Decision 2013-296 ATCO Electric Ltd. - AUC · 2 • AUC Decision 2013-296 (August 9, 2013) 7. On January 25, 2013, ATCO Electric filed correspondence with the AUC requesting an extension

Decision 2013-296

ATCO Electric Ltd. Rate Regulation Initiative Performance-Based Regulation Z Factor Adjustment Application August 9, 2013

The Alberta Utilities Commission

Decision 2013-296: ATCO Electric Ltd.

Rate Regulation Initiative, Performance-Based Regulation, Z Factor Adjustment Application

Application No. 1609120

Proceeding ID No. 2301

August 9, 2013

Published by


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Calgary, Alberta

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Website: www.auc.ab.ca

http://www.auc.ab.ca/

AUC Decision 2013-296 (August 9, 2013) • i

Contents

1 Introduction ........................................................................................................................... 1

2 Background and ATCO Electric Ltd.’s application .......................................................... 3

3 Legislative provisions ............................................................................................................ 7

4 Issues ...................................................................................................................................... 9 4.1 Treatment of REA acquisition costs .............................................................................. 9 4.2 Qualification as a Z factor ............................................................................................ 10

4.2.1 Criterion 1 - The impact must be attributable to some event outside

management’s control. .................................................................................... 10

4.2.2 Criterion 2 - The impact of the event must be material. ................................. 13

4.2.3 Criterion 3 - The impact of the event should not have a significant influence

on the inflation factor in the PBR formulas. ................................................... 14

4.2.4 Criterion 4 - All costs claimed as an exogenous adjustment must be prudently

incurred. .......................................................................................................... 15 4.2.5 Criterion 5 -The impact of the event was unforeseen. .................................... 18

4.3 Allocation of the costs .................................................................................................. 18

5 Commission findings ........................................................................................................... 19

6 Order .................................................................................................................................... 25

Appendix 1 – Proceeding participants ...................................................................................... 27

Appendix 2 – Summary of Commission directions .................................................................. 28

List of tables

Table 1. Summary of REA acquisitions ................................................................................... 5

Table 2. REA related revenue requirement impact in 2013 .................................................. 7

AUC Decision 2013-296 (August 9, 2013) • 1


Calgary, Alberta

ATCO Electric Ltd. Decision 2013-296

Rate Regulation Initiative, Performance-Based Regulation Application No. 1609120

Z Factor Adjustment Application Proceeding ID No. 2301

1 Introduction

1. On December 14, 2012, ATCO Electric Ltd. (ATCO Electric) filed an application with

the Alberta Utilities Commission (AUC or Commission) wherein it requested approval to

incorporate into its 2013 performance-based regulation (PBR) rates, through a Z factor

adjustment, the impact of the purchase of 10 Rural Electrification Associations (REA). The

proposed 2013 Z factor adjustment is $6.3 million, which is the 2013 revenue requirement

relating to the REA acquisitions totaling $119.1 million, as set out in Appendix 1 of the

application. ATCO Electric also sought Commission approval of the prudence of the REA

acquisitions.

2. The panel of the Commission for this proceeding is comprised of Mr. Mark Kolesar

(panel chair), Mr. Bill Lyttle and Mr. Neil Jamieson.

3. The AUC issued a notice of application on December 18, 2012, requiring interested

parties to submit a statement of intent to participate (SIP) by January 2, 2013.

4. The Commission received SIPs from EPCOR Distribution & Transmission Inc. (EDTI),

the Office of the Utilities Consumer Advocate (UCA), the North Parkland Power Rural

Electrification Association (NPPREA), the Lakeland Rural Electrification Association Limited

(LLREA), and AltaGas Utilities Inc. (AUI). EDTI and AUI indicated that they intended to

monitor the proceeding but reserved the right to fully participate if necessary. The UCA

requested that, at a minimum, the process schedule provide for information requests (IRs) prior

to any argument and reply argument. Depending on the responses to IRs, the UCA stated that it

may file intervener evidence. The NPPREA and LLREA both indicated that they would

participate in the proceeding.

5. On January 7, 2013, the Commission issued a letter outlining the process schedule with a

deadline for IRs to the applicant of January 21, 2013, and IR responses due by February 4, 2013.

Given the UCA’s statement that it may file intervener evidence, the Commission also requested

parties to file a letter with the Commission by February 6, 2013, indicating whether or not they

expected to file intervener evidence. The Commission added that upon receipt of intervener

submissions, it would revise the process schedule if further steps were required.

6. On January 9, 2013, the Commission received a SIP from AltaLink Management Ltd.

(AML) indicating that it did not intend to actively participate in the proceeding, but if certain

issues arose that in its view were material in nature, it may choose to actively participate. AML

also submitted a letter indicating that it had missed the deadline because of an inadvertent error

arising from the unavailability of staff. On January 14, 2013, the Commission issued a letter

granting approval for AML to register in this proceeding.

Rate Regulation Initiative, Performance-Based Regulation Z Factor Adjustment Application ATCO Electric Ltd.

2 • AUC Decision 2013-296 (August 9, 2013)

7. On January 25, 2013, ATCO Electric filed correspondence with the AUC requesting an

extension to the deadline for filing its responses to IRs from Monday, February 4, 2013, to

Thursday, February 14, 2013. In its letter, ATCO Electric cited, as reasons for requesting the

deadline extension, the volume of information requests, the complexity of the subject matter, the

heavy regulatory schedule and the absence of key ATCO Electric personnel until the first week

of February.

8. The Commission considered the reasons provided by ATCO Electric for not being able to

meet the current deadline and was satisfied that the request for a deadline extension for the filing

of IR responses was reasonable under the circumstances. The Commission granted the request

and extended the deadline for submitting its response to IRs to February 14, 2013, and revised

the deadline for submitting letters indicating intentions to file intervener evidence to

February 19, 2013.

9. The UCA, the NPPREA and the LLREA each indicated in correspondence dated

February 19, 2013, that they intended to file intervener evidence.

10. The Commission established the following process schedule in a letter dated

February 21, 2013.

Process step Due date

Intervener evidence March 14, 2013

Information requests to interveners March 28, 2013

Information responses from interveners April 8, 2013

Rebuttal evidence April 18, 2013

Argument April 29, 2013

Reply argument May 13, 2013

11. By a letter dated March 21, 2013, the Commission revised the process schedule by

introducing a second round of Commission IRs to ATCO Electric, with responses to be filed on

April 8, 2013.

12. In an April 8, 2013, letter, ATCO Electric requested an extension to the deadline for the

IR responses to April 12, 2013. In its letter, ATCO Electric explained that it was unable to meet

the deadline due to the unavailability of resources and the heavy regulatory schedule.

13. In a letter dated April 8, 2013, the Commission granted the extension and revised the

remaining schedule as set out below:

Process step Due date

AUC information responses from ATCO Electric Round 2 April 12, 2013

Information responses from interveners April 12, 2013

Rebuttal evidence April 18, 2013

Argument April 29, 2013

Reply argument May 13, 2013

14. For the purposes of this decision, the Commission considers the record closed on

May 13, 2013.



15. In reaching the determinations set out within this decision, the Commission has

considered all relevant materials comprising the record of this proceeding. 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 Background and ATCO Electric Ltd.’s application

16. In Decision 2012-2371 on the Rate Regulation Initiative, Distribution Performance-Based

Regulation, the Commission established PBR plans for each of the electric and gas distribution

utilities that were a party to that proceeding, including ATCO Electric.

17. In its PBR application filed in Proceeding ID No. 566 which led to Decision 2012-237,

ATCO Electric sought approval to flow through the acquisition of REAs as a Y factor

adjustment.2 In Decision 2012-237, the Commission described the purpose of a Y factor as

follows:

617. In a PBR plan, Y factor costs are those costs that do not qualify for capital

tracker treatment or Z factor treatment and that the Commission considers should be

directly recovered from customers or refunded to them. Y factor costs in turn, could

either be 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.

18. The Commission denied ATCO Electric’s request for a Y factor treatment of REA

acquisition costs and instead determined that REA acquisitions might be assessed as a Z factor

under certain circumstances. The Commission’s determinations with regard to the treatment of

REA acquisitions in paragraph 690 of Decision 2012-237 is quoted below:

690. ATCO Electric, ATCO Gas and AltaGas all requested several different types of

acquisitions to be treated as Y factors including: REA acquisitions, gas co-op

acquisitions, and municipal annexations. The UCA objected to the flow-through

treatment of these accounts on the basis that a company should only make an acquisition

when it is economically beneficial for the company to do so, and therefore allowing flow-

through treatment is not necessary. The Commission considers that under certain

circumstances it may not actually be left to the discretion of management as to whether or

not the acquisition is made. In those circumstances, it may be necessary to assess the

impact of an acquisition through a Z factor application. Acquisitions within the control of

management would not generally qualify as either a Z factor or a Y factor.

1 Decision 2012-237: Rate Regulation Initiative, Distribution Performance-Based Regulation, Application

No. 1606029, Proceeding ID No. 566, September 12, 2012, paragraph 524. 2 Exhibit 1, application, paragraph 8.

http://www.auc.ab.ca/applications/decisions/Decisions/2012/2012-237.pdf



19. Decision 2012-237 included a Z factor mechanism as an additional method to adjust PBR

rates in certain circumstances. The purpose of a Z factor was described in Decision 2012-237 as

follows:

523. The Commission considers it necessary to include a Z factor in the PBR plan to

account for the impact of material exogenous events for which the company has no other

reasonable cost recovery or refund mechanism within the PBR plan.

20. The Commission established five criteria which must be met before the impact of an

event will qualify for a Z factor treatment resulting in an adjustment to PBR rates.

(1) The impact must be attributable to some event outside management‘s control.

(2) The impact of the event must be material. It must have a significant influence on

the operation of the company otherwise the impact should be expensed or

recognized as income, in the normal course of business.

(3) The impact of the event should not have a significant influence on the inflation

factor in the PBR formulas.

(4) All costs claimed as an exogenous adjustment must be prudently incurred.

(5) The impact of the event was unforeseen.3

21. In its December 14, 2013, application, ATCO Electric requested a Z factor adjustment for

the revenue requirement allocable to 2013 with respect to the acquisition of 10 REAs.

ATCO Electric submitted that the REA acquisitions satisfied each of the Z factor criteria and

requested that the Commission approve a rate adjustment in 2013 that permits recovery of its

costs associated with inclusion of a 2013 Z factor in its PBR formula in the amount of

$6.3 million related to the REA acquisitions.4 The remaining capital costs would be recovered in

subsequent years. The table below provides a summary of the REA acquisitions:

3 Decision 2012-237, paragraph 524.

4 Exhibit 1, application, paragraph 38.



Table 1. Summary of REA acquisitions5

REA Purchase

offer requested by

REA

Purchase offer

made by ATCO

Electric

REA acquisition

cost

($ million)6

AUC Decision approving sale and transfer of

the REA to ATCO Electric

Transfer of REA assets to ATCO Electric

1.Melrose April 2009 December 2010

$1.89 2011-0877

July 2011

2. Peace Grove-Worsley

July 2010 March 2011 $13.49 2011-2388 August 2011

3. Munson

November 2010

August 2011 $1.44 2011-4279 February 2012

4. Plain Lake

March 2011 June 2011 $4.16 2011-42910 January 2012

5. Greenlawn

December 2010

June 2011 $4.61 2011-42811 January 2012

6. Cadron-Highway

April 2011 November 2011

$2.67 2012-04812 March 2012

7. Valleyview

May 2011 October 2011

$5.96 2011-46013 May 2012

8. Manning December 2011

April 2012 $12.29 2012-29614 and 2013-13215

October 2013 (date approved for transfer)

5 Exhibit 1, application, Appendix 1.

6 The acquisition costs submitted in the application are different from the acquisition costs submitted in the AUC

decisions approving the sale and transfer of the REAs. In AUC-AE-7, ATCO Electric explained that the

discrepancy between the two amounts was due to directly attributable purchase related costs. For Manning

REA, the discrepancy is larger because in addition to purchase related costs it includes recovery of accounts

receivable. The following is a list of the purchase price negotiated between ATCO Electric and the REAs as

provided in the AUC decisions approving the sale and transfer of the REAs: Melrose REA-$1,843,500, Peace

Grove - Worsley REA-$13,118,062, Munson REA-$1,413,160, Plain Lake REA-$4,078,639, Greenlawn REA-

$4,522,521, Cadron-Highway REA-$2,621,374, Valleyview REA-$5,842,574, Manning REA-$11,764,347. 7 Decision 2011-087: ATCO Electric Ltd. Sale and Transfer of Melrose Rural Electrification Association Ltd.,

Application No. 1607046, Proceeding ID No. 1096, March 10, 2011. 8 Decision 2011-238: ATCO Electric Ltd. Sale and Transfer of Peace Grove - Worsley Rural Electrification

Association Ltd., Application No. 1607323, Proceeding ID No. 1237, June 2, 2011. 9 Decision 2011-427: ATCO Electric Ltd. Sale and Transfer of Munson Rural Electrification Association Ltd.,

Application No. 1607749, Proceeding ID No. 1494, October 27, 2011. 10

Decision 2011-429: ATCO Electric Ltd. Sale and Transfer of Plain Lake Rural Electrification Association Ltd.,


Decision 2011-428: ATCO Electric Ltd. Sale and Transfer of Greenlawn Rural Electrification Association Ltd.,


Decision 2012-048: ATCO Electric Ltd. Discontinuation of the Operation of an Electric Distribution System

Cadron-Highway Rural Electrification Association Ltd., Application No. 1608096, Proceeding ID No. 1682,

February 16, 2012. 13

Decision 2011-460: ATCO Electric Ltd. Sale and Transfer of Valleyview Rural Electrification Association Ltd.,

Application No. 1607878, Proceeding ID No. 1567, November 23, 2011. 14

Decision 2012-296: ATCO Electric Ltd. Sale and Transfer of Manning Rural Electrification Association Ltd.,

Application No. 1608914, Proceeding ID No. 2188, November 6, 2012. 15

The Commission granted its approval for the sale and transfer of Manning REA, to be effective on April 5,

2013, in Decision 2012-296. On March18, 2013, ATCO Electric made an application on behalf of Manning

REA to alter the effective date of the sale and transfer from April 5, 2013 to October 5, 2013, which was

granted in Decision 2013-132: ATCO Electric Ltd., Extension of Manning Rural Electrification Association

Ltd., Transfer Date to ATCO Electric Ltd., Application No. 1609394, Proceeding ID No. 2506, April 5, 2013.












REA Purchase

offer requested by

REA

Purchase offer

made by ATCO

Electric

REA acquisition

cost

($ million)6

AUC Decision approving sale and transfer of

the REA to ATCO Electric

Transfer of REA assets to ATCO Electric

9. Elk Point

December 2011

September 2012

$5.46 Application for sale and transfer not currently before the Commission

2013 (estimated)

10. Peace Country April 2011 March 2012 $67.07 Application for sale and transfer not currently before the Commission

2013 (estimated)

22. As shown in the table above, the sale and transfer of seven of the 10 REAs were

completed in 2011 and 2012 after the Commission granted its approval for the sale and transfer

of each of the REAs to ATCO Electric under Sections 29, 30 and 32 of the Hydro and Electric

Energy Act.16 The sale and transfer of the Manning REA has been approved by the Commission

for implementation on October 5, 2013. ATCO Electric has not yet applied to the Commission

for approval for the sale and transfer for the Elk Point and Peace Country REAs.

23. The decisions approving the sale and transfer of the REAs considered whether a sale and

transfer is in the public interest, given the purchase agreement and the documentation on the

record of each of the sale and transfer proceedings for the REA. In approving the sale and

transfers of each of the eight REAs to ATCO Electric, the Commission did not make any

findings on the prudency of the purchase price of the REA or with respect to the amounts at

which the REA assets may subsequently be incorporated into the ATCO Electric rate base.

24. ATCO Electric submitted that the acquisition of the REAs included in the Z factor

application were unforeseen at the time of ATCO Electric’s last general tariff application (GTA),

the 2011-2012 GTA.17 It also submitted that the majority of the REA purchases occurred in 2011

and 2012, before the outcome of the PBR decision was known, and that this application is

ATCO Electric’s first opportunity under PBR to request Commission approval to recover the

revenue requirement impacts associated with the purchase of REA assets.18

16

RSA 2000, c. H-16. 17

Exhibit 1, application, paragraph 17. 18

Exhibit 1, application, paragraph 16.



25. The total proposed 2013 revenue requirement impact resulting from the purchase of the

REAs is $6.3 million. The breakdown of the revenue requirement impact by REA in 2013 is set

out in the table below:

Table 2. REA related revenue requirement impact in 2013

REA Year of transfer of REA assets to ATCO Electric

2013 net revenue requirement impact

($)

Melrose 2011 149,207

Peace Grove-Worsley 2011 1,089,177

Munson 2012 120,784

Plain Lake 2012 364,863

Greenlawn 2012 377,618

Cadron-Highway 2012 223,615

Valleyview 2012 466,757

Manning 2013 496,390

Elk Point 2013 (estimated) 229,340

Peace Country 2013 (estimated) 2,733,674

Total 6,251,427

26. ATCO Electric proposed to recover the revenue requirement impact of the REA

acquisitions by way of a Z factor adjustment in the amount of $6.3 million in 2013. It proposed

to collect the Z factor adjustment from April to December 2013 based on an allocation of the

Z factor amount to all rate classes based on each rate class’s proportionate share of 2013

revenue.19

3 Legislative provisions

27. The legislative provisions applicable to a sale and transfer of REAs are found in the

Electric Utilities Act,20 the Hydro and Electric Energy Act, and the Rural Utilities Act.21

28. The Electric Utilities Act defines an REA as “an association under the Rural Utilities Act

that has as its principal object the supply of electricity to its members.”22 An REA is an owner of

an electric distribution system as defined in the legislation23 and may distribute electricity to its

members in a service area, the boundaries of which are determined by the Commission under the

Hydro and Electric Energy Act.24

29. Part 3 of the Hydro and Electric Energy Act addresses the operation of electric

distribution systems including the determination of service areas, alterations of boundaries of a

service area, cessation of operations and discontinuance of service. Section 29(1) provides that

19

Exhibit 21, AUC-AE-11. 20

SA 2003 c. E-5.1. 21

RSA 2000, c. R-21. 22

Section 1(1)(vv) of the Electric Utilities Act. 23

Section 1(1)(l.1) of the Electric Utilities Act and Section 1(1)(b) of the Hydro and Electric Energy Act. 24

Section 1(1)(m) and Section 28, Hydro and Electric Energy Act, Section 1(1)(ww) of the Electric Utilities Act.



the Commission may alter the boundaries of the service area of an electric distribution system, or

order that an electric distribution system cease to operate in a service area or part of it, when the

Commission is of the opinion that it is in the public interest.

30. Under Section 29(4) of the Hydro and Electric Energy Act, when an order is made

reducing the service area of an electric distribution system, the Commission may make provision

in the order for several matters, including the payment of compensation to the owner of the

electric distribution system whose service area is reduced, including compensation in respect of

“any facilities transferred, based on reproduction cost new, less depreciation, …” provided

however that, in the event an agreement on the amount of any compensation cannot be reached

between the parties, the amount is to be determined by the Commission on the application of

either party.

31. Discontinuance of service is covered under Section 30 of the Hydro and Electric Energy

Act:

30(1) No holder of an approval under this Part and no person who operated an electric

distribution system on June 1, 1971 shall discontinue the operation of the holder’s or

person’s electric distribution system or discontinue the distribution of electric energy in

any area, except in a case of emergency or for repairs and maintenance, unless the holder

or person has obtained authority in writing from the Commission to do so.

(2) The Commission may make any order on an application under this section that it

considers just and proper and in the public interest.

32. Section 32 specifically addresses rural electrification associations, and states:

32(1) If a rural electrification association

(a) under an order made under section 29,

(i) has the size of its service area reduced, or

(ii) ceases to operate in a service area or part of it,

or

(b) on being authorized under section 30 to do so, discontinues the operation of

its electric distribution system, the Commission may, when in the

Commission’s opinion it is in the public interest to do so and on any notice

and proceedings that the Commission considers suitable, by order transfer to

another person the service area or part of it served by the rural electrification

association.

(2) When the Commission makes an order under subsection (1), it may

(a) for the purpose of ensuring the continued distribution of electric energy in

the service area or part of it that was served by the rural electrification

association, provide for

(i) the transfer of any facilities associated with the electric distribution

system from the rural electrification association to another party, and



(ii) the operation of the electric distribution system or part of it by any

party that the Commission directs,

and

(b) provide for any or all of the following:

(i) the payment of compensation, if any, and the matters in respect of

which compensation is payable;

(ii) the persons by whom compensation is payable and the apportionment

of liability for the compensation among those persons;

(iii) the determination by the Alberta Utilities Commission of the amount

of compensation if that amount cannot be agreed on between the

parties;

(iv) any other matters that may be necessary with respect to the transfer of

the service area or part of it or with respect to the transfer of any

facility associated with the electric distribution system from the rural

electrification association to another person.

(3) In this section, “rural electrification association” means an association as defined in

the Rural Utilities Act and that has as its principal object the supplying of electric energy

in a rural area to the members of that association.

33. The Rural Utilities Act sets out the governance requirements to be followed by the REA

in authorizing a sale of its facilities. Section 23 of the Rural Utilities Act provides that an

association may, by extraordinary resolution, authorize the sale of all its works to a utility

company.

4 Issues

4.1 Treatment of REA acquisition costs

34. ATCO Electric filed its Z factor application following the Commission’s determination in

Decision 2012-237 that REA acquisitions would not be approved as a Y factor. ATCO Electric

submitted that the REA acquisitions satisfied each of the Commission’s Z factor criteria and the

revenue requirement impact of the acquisitions should be permitted as an adjustment to its 2013

rates. It further submitted that, if the Commission does not approve Z factor treatment for these

acquisitions, then these acquisitions must be approved through a capital tracker or a variance of

the PBR decision in order to provide ATCO Electric with an opportunity to recover its prudently

incurred costs.25

35. The UCA, in its reply argument, noted that ATCO Electric had the opportunity to include

its REA purchases related to 2012 and earlier as a going-in rate adjustment, either in the PBR

25

Exhibit 1, application, paragraph 13.



proceeding (Proceeding ID No. 566) or in the PBR compliance filing (Proceeding ID No. 2130)

and that ATCO Electric did not pursue this opportunity.26

36. In AUC-AE-3, ATCO Electric submitted that it would be prepared to accept an

adjustment to its going-in rates, which would then be subject to the I-X mechanism thereafter, to

address the REA purchases that occurred prior to 2013 if that is the Commission’s preference.

4.2 Qualification as a Z factor

37. In order to qualify for a Z factor adjustment, the REA acquisitions must meet all five

criteria established by the Commission. The following provides an overview of the submissions

of the parties on whether the REA acquisitions satisfy the test for a Z factor adjustment.

4.2.1 Criterion 1 - The impact must be attributable to some event outside

management’s control.

38. ATCO Electric submitted that it only prepares an offer to acquire an REA’s distribution

system in response to a request to prepare an offer from an REA board of directors. ATCO

Electric explained that REA acquisitions are outside of ATCO Electric’s control because the

REA must initiate a process to cease operations or to sell its assets. ATCO Electric stated that it

did not initiate the process to purchase the REA assets, which are the subject of this proceeding,

nor can it conclude the purchase transactions and include them in rates without the approval of

both the REA membership and the Commission.27

39. ATCO Electric submitted that, if any of the subject REAs made the decision to

discontinue its operations and was permitted to do so, the former REA customers would

automatically become ATCO Electric’s customers because the service areas of the REA and

ATCO Electric overlap, and ATCO Electric has a duty to serve all customers within its service

area requiring service. Consequently, ATCO Electric would become obligated to provide service

to these customers and the only logical and efficient means of providing service is to purchase

the existing REA facilities rather than build new, duplicative ones. ATCO Electric stated that it

has no real management discretion not to proceed with REA purchases once it has been

requested to make an offer.28

40. ATCO Electric stated that under Section 32(2) of the Hydro and Electric Energy Act, the

Commission has the authority to order the transfer of REA facilities to another operator. A

refusal by ATCO Electric to provide an offer to purchase an REA’s facilities in response to a

request for a proposal from the REA could trigger a compulsory acquisition and, given the

significant degree of physical and operational integration between ATCO Electric’s distribution

facilities with those of the REAs, ATCO Electric submitted that it is unlikely that there will be a

better positioned party to acquire and operate the REA facilities.29

26

Exhibit 42, UCA reply argument, paragraph 9. 27

Exhibit 39, ATCO Electric argument, paragraph 28. 28


Exhibit 39, ATCO Electric argument paragraphs 20 and 21.



41. In UCA-AE-3 ATCO Electric stated:

While ATCO Electric has the option to decline to provide an offer to purchase when

requested by the REA, once the REA has decided it is time to cease operations, it would

likely trigger the compulsory acquisition provisions of the legislation.

42. The Commission asked ATCO Electric in an IR to provide support with reference to

regulatory decisions, court decisions, Hansard and government policy for ATCO Electric’s

position that it would be compelled, under the provisions of the Hydro and Electric Energy Act,

to acquire an REA should the REA obtain approval of the Commission to cease operations under

Section 30 of the Hydro and Electric Energy Act. ATCO Electric, in its response, explained:30

The scenario postulated in the question would trigger ATCO Electric's obligation to serve

the REA's former members since their respective service areas overlap and, upon

cessation of REA operations, the former REA members would become ATCO Electric's

customers.

With respect to whether it is certain that a compulsory acquisition process would be

triggered, ATCO Electric acknowledges that the language used in response to UCA-AE-3

("… would likely trigger …") may appear to imply that outcome. On the other hand,

response to AUC-AE-4 contained less definitive wording, noting that failure to grant the

relief requested "… in this Z factor application, may result in a compulsory acquisition

process …" (at page 2 of 2; emphasis supplied). To be clear, ATCO Electric cannot be

certain that a compulsory acquisition process would be triggered because the decision to

do so is not within ATCO Electric's control. It is up to the REA to initiate the process to

exit the utility function and to transfer its facilities at a fair price to an electric distributor.

43. ATCO Electric further added:

ATCO Electric has been unable to identify any regulatory decisions, court cases, Hansard

excerpts or government policy which deals specifically with this unique situation. That is

not surprising in light of the fact that the traditional process has worked satisfactorily for

REAs and their members who were no longer prepared to bear the burden of owning and

operating their own electric distribution system.

Disrupting that process now will not likely alter an REA's motivation to cease operations

and sell. Rather, it would more likely incline an REA to pursue the other procedural

options available to allow it to escape the unwanted burdens of utility ownership and

operation. One such option is the process outlined in the Application involving sections

25, 27, 29, 30 and 32 of the HEEA. The legislative provisions cited clearly make a

compulsory acquisition option available. The fact that the legislation may not have been

used in that fashion in the past does not mean it cannot be used in that manner in the

future.

44. The UCA argued that the reasons provided by ATCO Electric are not reasons why ATCO

Electric must purchase an REA.31 It asserted that there is no evidence of a legal compulsion to

purchase an REA under Section 32(2) of the Hydro and Electric Energy Act. It also noted that

ATCO Electric has not provided any evidence that the REA would apply for discontinuance of

30


Exhibit 40, UCA argument, paragraph 5.



service if the Z factor application is not approved. The UCA submitted that ATCO Electric

cannot rely on a future possibility as justification for an expenditure being outside the control of

management.32

45. In its argument, the UCA also referenced Decision 2013-132 on the sale and transfer of

the Manning REA, where the Commission noted:

3. …there is a condition precedent in clause 12 of the purchase agreement related to

the recovery of the costs associated with the Manning REA distribution system purchase.

ATCO Electric stated that its ability to recover the full purchase price for inclusion in

revenue requirement is linked directly to its performance-based regulation (PBR) Z-

Factor Adjustment Application (Application No. 1609120, Proceeding ID No. 2301).33

46. The UCA argued that, since management was able to have the purchase subject to the

approval of the application, ATCO Electric has control over the terms of the purchase.34

Accordingly, the UCA concluded that ATCO Electric had not met the requirements of the first

Z factor criterion and that the application should be denied.35

47. NPPREA and LLREA submitted a copy of a letter36 from ATCO Electric to

Peace Country REA members as evidence that, in its opinion, shows that ATCO Electric

aggressively pursues the acquisition of REAs. These two REAs argued that the letter attempts to

convince REA members to sell with phrases such as “money in your pocket” and the proposition

that REA members are insulated from the costs of the sale because they are recovered over 30

years and “shared by all 213,000 ATCO Electric customers.”37 They expressed their concern that

such a sales pitch, has the effect of making the option of selling out to ATCO Electric look very

attractive to REA members, and artificially lowers the attractiveness of the option of REA

members operating their own system.”38

48. The UCA also referred to the letter from ATCO Electric to Peace Country REA members

submitted by NPPREA and LLREA and noted that the letter only outlines the problems, but no

benefits to being a self-operating REA, along with the voting places and dates for the REA

members to vote for the transfer. Based upon this, the UCA argued that, while ATCO Electric

may not have solicited REA proposals, the letter is sufficient evidence demonstrating that ATCO

Electric’s purchase of an REA and how it conducts its REA acquisition program is within the

control of ATCO Electric’s management.39

32

Exhibit 40, UCA argument, paragraph 14. 33

Decision 2013-132, paragraph 3. 34

ATCO Electric requested Commission approval for a time extension to the Manning acquisition closing date

because it did not anticipate a decision on the Z factor adjustment for REA purchases would be received prior to

the effective date of April 5, 2013 approved in Decision 2012-296. ATCO Electric relied on the condition

precedent in clause 12 to the purchase agreement relating to the recovery of the costs associated with the

Manning REA purchase in support of its application to change the effective date of the sale and transfer to

October 5, 2013. The Commission granted the change of the effective date of the sale and transfer to October 5,

2013, in Decision 2013-132. 35

Exhibit 40, UCA argument, paragraph 13 and 19. 36

Exhibit 17.03, NPPREA/LLREA-AE-02, Attachment 1. 37

Exhibit 41, NPPREA and LLREA argument, paragraph 12. 38


Exhibit 42, UCA reply argument, paragraphs 15-17.



49. ATCO Electric submitted that the questions and factual responses in the letter are similar

to the types of questions that have been asked by other REAs considering a sale. ATCO Electric

submitted that its approach in this case and with all REA purchase requests is to be transparent

and to ensure REA members have accurate information to address their questions.40

4.2.2 Criterion 2 - The impact of the event must be material.

50. In paragraph 535 of Decision 2012-237, the Commission established the materiality

threshold for a Z factor, stating:

535. …Accordingly, the Commission establishes the threshold as the dollar value of a

40 basis point change in ROE on an after tax basis calculated on the company’s equity

used to determine the revenue requirement on which going-in rates were established

(2012). This dollar amount threshold is to be escalated by I-X annually.

51. ATCO Electric’s materiality threshold, based upon the approved methodology for

calculating the materiality threshold for a Z factor adjustment is $ 2.2 million for 2013.41

52. Accordingly, ATCO Electric submitted that the revenue requirement impact of the

acquisitions has been reduced by the incremental revenues that would be received42 and that it

has properly calculated the revenue requirement impact of the acquisitions. ATCO Electric

submitted that its application satisfies the materiality threshold criterion for a Z factor stating:

ATCO Electric considers the Z factor event in the Application to be the impact of the

REA acquisition program, totaling $119.1 million that are known and are not being

financed through any other PBR mechanism. ATCO Electric submits that materiality

must be assessed based on the impact of the program during the duration of the PBR

term, not just a single mid-year calculation.43

53. ATCO Electric submitted that “the REA acquisitions qualify for Z factor treatment

because the program meets the five Z factor criteria set out in Decision 2012-237.”44

ATCO Electric submitted that this approach to grouping the REA acquisitions was supported by

the Commission’s direction for assessing the materiality of capital trackers at paragraph 601 of

Decision 2012-23745:

601. …The Commission also considers that it would not be suitable to group together

several dissimilar projects into a single large project to give the appearance of materiality.

However, a number of smaller related items required as part of a larger project might

qualify for capital tracker treatment.

54. ATCO Electric noted that the Commission has approved the acquisition and dissolution

of the service areas for eight of the REAs, meaning that ATCO Electric now has the obligation to

40


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., 2012 Performance-Based Regulation Compliance Filings, 2012 Performance-Based

Regulation Compliance Filings, Application No. 1608826, Proceeding ID No. 2130, March 4, 2013. 42




Exhibit 21, AUC-AE-9.




provide distribution service to these areas. Further, the majority of the REA purchases occurred

in 2011 and 2012, before the outcome of the PBR decision was known. ATCO Electric

submitted that “the materiality threshold, if applied to each separate REA acquisition, will deny

ATCO Electric a reasonable opportunity to recover its prudently incurred costs and earn a fair

return on the capital investment.”46

55. The UCA disagreed with ATCO Electric’s position and argued that the materiality

threshold should be assessed on the basis of each individual acquisition, each year, and it

referred to the Commission’s comments at paragraph 534 of Decision 2012-327 which states:

534. Exogenous events may occur during the PBR term but by definition they are

exceptional occurrences which may either add costs to, or remove costs from, the

provision of utility service. Additionally, not all events beyond the control of the

company will qualify under other Z factor criteria, thereby further reducing the number of

already rare events that could result in a rate adjustment outside of the I-X mechanism.

Given the exceptional nature of a qualifying exogenous event and the equally exceptional

measure of authorizing a recovery outside of the I-X mechanism, the Commission

considers that the PBR principles require a relatively high threshold and that this

threshold should apply to each event unless otherwise permitted in exceptional

circumstances.

56. The UCA submitted that when the REA acquisitions are assessed individually, only the

Peace Country REA meets the $2.2 million materiality threshold. Accordingly, the UCA

submitted that none of the other nine proposed REA acquisitions can be said to meet the

requirements of the second criterion.47

57. The UCA argued that, even if one were to accept ATCO Electric’s premise that

purchases should be grouped, the purchases span the years 2011 to 2013 and events spanning a

number of years should not be grouped together. When the REA purchases are grouped on the

basis of when the acquisitions are made, only the 2013 acquisitions with a combined impact of

$3.549 meet the threshold of a Z factor adjustment.48 Application of the criterion in this manner

would lead to greater regulatory efficiencies because there would be far fewer acquisitions for

the Commission to assess.49

58. In its argument, ATCO Electric responded to the UCA by submitting that grouping REA

purchases by year would serve no purpose other than to deny ATCO Electric an opportunity to

recover its prudently incurred costs. It further added that fragmentation of the program would

also undermine the regulatory efficiency that PBR seeks to achieve because it will lead to

multiple REA Z factor applications.50

4.2.3 Criterion 3 - The impact of the event should not have a significant influence on

the inflation factor in the PBR formulas.

59. ATCO Electric submitted that the REA acquisitions do not have any influence on the

inflation factor in the PBR formula. None of the parties raised an issue regarding this criterion.

46


Exhibit 28, evidence of Russ Bell, page 5. 48

Exhibit 28, evidence of Russ Bell, pages 6-7. 49


Exhibit 39, ATCO Electric argument, paragraph 13.



4.2.4 Criterion 4 - All costs claimed as an exogenous adjustment must be prudently

incurred.

60. ATCO Electric submitted that the prudence of an REA acquisition by ATCO Electric is

assessed in two stages. Firstly, the REA under Section 23 of the Rural Utilities Act authorizes the

sale of its distribution system to ATCO Electric. The REA then has to make an application to the

AUC under the Hydro and Electric Energy Act to determine if the transfer of the REA’s electric

distribution system to ATCO Electric is in the public interest. The Commission then makes its

public interest determination with regard to the sale and transfer, and issues its decision. No

determination is made at that time by the Commission regarding the prudence of the purchase

price, which comprises the second stage in the determination of the prudence of the acquisition.

ATCO Electric stated that this second stage prudence evaluation has historically been done in a

Phase I GTA. However, because ATCO Electric will not be filing a GTA during the PBR term, it

proposed the prudence of the REA acquisition price should be considered in the context of this

proceeding.51

61. With respect to the prudence of acquiring the REAs, ATCO Electric outlined the

efficiencies that will be gained by the integration of the REA and the utility’s systems, stating:52

i. Effective completion of system planning and development when systems of both the

REA and ATCO Electric are viewed as a whole.

ii. Operations and maintenance of these integrated systems are more effectively executed

with one system operator.

iii. New extensions and capital projects can be planned, designed and executed more

efficiently by a utility with its greater capacity for engineering, procurement and

construction of distribution networks.

62. ATCO Electric also added that REA purchases have consistently been found to be in the

public interest by the Commission and, given the benefits of integrating the distribution systems,

there is no reason to delay or defer an REA purchase. It elaborated further on the problems of

delaying a purchase:53

Indeed, a failure to proceed with the acquisition or a delay in taking such action could

present significant risk to the REA, its members, and other non-REA customers in the

area, particularly if the electric facilities should fail resulting in long duration outages and

other potential public safety related issues such as poles and wires collapsing. It would be

contrary to the public interest and inconsistent with the utility's duty to improve the

electric system to refuse a request for "offer" or defer a decision to acquire. Again,

greater system safety, reliability and efficiency of current and future extensions are

realized by ATCO Electric’s acquisitions of REAs.

63. With respect to the prudence of the acquisition price paid to each REA, ATCO Electric

submitted that each acquisition price was prudent because they were determined using the

replacement cost new less depreciation (RCN-D) methodology to value the assets. The company

51

Exhibit 1, application, paragraphs 30-33. 52

Exhibit 1, application, pages 7-9. 53

Exhibit 1, application, paragraphs 24-25.



submitted that this method for determining the price for an REA has been consistently endorsed

by the Commission and its predecessors for both FortisAlberta Inc. and ATCO Electric.54 55

64. In an IR from the UCA, ATCO Electric was asked to confirm that there is no requirement

to value REA purchases at RCN-D. In its response, ATCO Electric stated:

Not confirmed. In the case of REA acquisitions, the Commission has the authority under

Section 29(4)(c)(i) of the Hydro and Electric Energy Act to direct that compensation be

paid for “any facilities transferred, based on reproduction cost new, less depreciation”.

It is ATCO Electric’s view that should an REA wish to discontinue its operations by

selling its assets to ATCO Electric and ATCO Electric were to offer to purchase at an

amount less than RCN-D, the REA could apply under Section 30 of the HEEA to

discontinue its operations rather than accept the low purchase offer, then trigger a

compulsory acquisition process and await determination by the Commission of

compensation on the basis of RCN-D. Therefore to offer less than RCN-D in response to

an REA request could result in reduction of existing service levels to customers and

unnecessary regulatory burden, cost and uncertainty, only to ultimately arrive at RCN-D

via Commission ordered compensation. Such a process would gain nothing and would

not be in the public interest nor would it support regulatory efficiency. As confirmation

of the appropriateness of this approach, ATCO Electric would note that the Commission

has approved without exception RCN-D as an appropriate valuation methodology for all

recent REA acquisitions.56

65. In AUC-AE-18, the Commission asked ATCO Electric to confirm the Commission’s

discretionary authority pursuant to Section 32 of the Hydro and Electric Energy Act to compel a

distribution utility to acquire the facilities of an REA that has obtained Commission approval to

discontinue operations under Section 30 of the Hydro and Electric Energy Act. ATCO Electric

stated the following about the Commission’s discretion with respect to the approval of the

purchase price to be paid to an REA under Section 32 of the Hydro and Electric Energy Act:

ATCO Electric notes that section 32(2)(b) of the HEEA stipulates that the Commission

could "provide for the payment of compensation" to the REA and "may … provide" for

"the matters in respect of which compensation is payable;" (section 32(2)(b)(i))

Section 32(2)(b)(iii), however, only confers discretionary authority upon the Commission

to determine the amount of compensation payable "… if that amount cannot be agreed on

between the parties;". Where the REA and the distribution utility have agreed upon a

price based on RCN-D, it would not appear that the Commission has discretionary

authority to determine a different price.

66. The Commission also queried why ATCO Electric considers the RCN-D methodology

would be the only methodology to be used in determining the valuation price, if ATCO Electric

54

Exhibit 1, Application, paragraph 34. 55

Some of the prior decisions approving REA purchases on the basis of RCN-D are:

Decision 2011-134: ATCO Electric Ltd., 2011-2012 Phase I Distribution Tariff, 2011-2012 Transmission

Facility Owner Tariff, Application No. 1606228, Proceeding ID No. 650, April 13, 2011.

Decision 2010-309: FortisAlberta Inc., 2010-2011 Distribution Tariff- Phase I, Application No. 1605170,

Proceeding ID. 212, July 6, 2010.

Decision 2003-071: ATCO Electric Ltd., 2003-3004 General Tariff Application, Rate Case Deferrals

Application, 2001 Deferral Application, Application Nos. 1275494, 1275539, and 1275540, October 2, 2003. 56

Exhibit 20, UCA-AE-1(c).






were to be directed to acquire an REA under Section 32 of the Hydro and Electric Energy Act,

when Section 32(2)(b)(i) does not reference RCN-D.57 In response to the information request,

ATCO Electric referred to Decision 2010-309 where the Commission approved REA

acquisitions by FortisAlberta on the basis of RCN-D. ATCO Electric stated:

While section 32 of the HEEA deals also with the transfer of the REA’s electric

distribution system, it does not specify the method in determining the level of

compensation. The AUC noted in Decision 2010-309 that “when analyzing the scheme of

an Act, the Commission must consider how the provisions or parts of an Act work

together…”. The AUC noted that section 29 of the HEEA determines the level of

compensation as “any facilities transferred, based on reproduction cost new, less

depreciation” (RCN-D).

…Given the reference to section 29 in section 32 of the HEEA, and the fact that the Act

must be read as a whole, the AUC determined in Decision 2010-309 “that the use of

RCN-D is an acceptable valuation for the purchase of an REA by a Commission-

regulated utility”. (footnote omitted)58

67. The UCA challenged the prudence of these acquisitions, given that ATCO Electric had

not attempted to offer a price less than determined by the RCN-D methodology.59 The UCA

submitted that the RCN-D valuation methodology was used under the cost of service rate-

making regime and this valuation methodology needs to change under the PBR framework. The

intent of PBR is to create the same incentives as a competitive market, and in a competitive

environment the purchase price should be based upon achieving a desired return on the

investment, given projected revenues and costs and not RCN-D.60

68. The UCA also submitted that Section 29(4)(c)(i) of the Hydro and Electric Energy Act

cited by ATCO Electric only indicates that the Commission may use the RCN-D methodology.61

It further added that ATCO Electric has also provided no evidence that demonstrates it must

(emphasis added by the UCA) provide an offer using RCN-D, and that ATCO Electric itself

acknowledged that it cannot be certain that a compulsory acquisition process would be triggered

if ATCO Electric failed to make an offer.62

69. ATCO Electric argued that the UCA’s proposal is not acceptable because it did not

specify in detail what the purchase price would be in a competitive environment and provided no

compelling reason as to why RCN-D is not appropriate under PBR.63

70. NPPREA and LLREA submitted that these acquisitions do not meet any reasonable

prudence test and that they are opposed to the application.64

57



Exhibit 28, evidence of Russ Bell, page 13. 60





Exhibit 41, NPPREA and LLREA argument, paragraph 28.



4.2.5 Criterion 5 - The impact of the event was unforeseen.

71. ATCO Electric submitted that, since it can neither foresee the initial request for offer nor

the REA vote authorizing the transfer and the Commission’s ultimate approval of the

acquisitions, these REA acquisitions can be categorized as unforeseen.65 In addition, ATCO

Electric does not control the aggregate price for all the REA acquisitions which might ultimately

be approved by the Commission, so the actual impact of REA purchases on revenue requirement

is not foreseeable.66

72. The UCA submitted that, while ATCO Electric does not know which REAs may

approach it, there is a long history of REA purchases, as acknowledged by ATCO Electric and,

as such, the potential for an REA purchase is not unforeseen or unlikely to potentially occur in

the future based on past history.67

4.3 Allocation of the costs

73. ATCO Electric proposed to allocate the Z factor amounts to rate classes based on each

rate class’s proportionate share of 2013 revenue. ATCO Electric submitted that this methodology

is reasonable and administratively efficient, from a regulatory perspective, because the acquired

assets are integrated with ATCO Electric’s area distribution system (facilities used by several

classes of customers) and become part of the integrated operation that benefits all customers.

Moreover, when ATCO Electric acquires an REA distribution system, the acquired assets are

captured in standard fixed asset accounts and ATCO Electric does not separate fixed asset

accounts by rate or revenue class. As a result, ATCO Electric proposed to allocate the costs to all

customer classes and not just the farm rate class.68 To further illustrate its point that all customer

classes share in the benefits of services provided by REA assets, ATCO Electric provided maps

to show that there are other customer classes, including residential, commercial and industrial

classes along with farm rate classes, in a typical REA.69

74. The UCA submitted that an REA serves rural customers and, under the principle of cost

causation, urban customers should not pay for the cost of an REA acquisition. It also quoted

paragraph 66 in Decision 2013-072, where the Commission made the following findings:

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.

75. The UCA also submitted that ATCO Electric has committed to complete a feeder

analysis as part of its upcoming Phase II distribution tariff application which would enable

ATCO Electric to assign costs of REA acquisitions to rural feeders, which will then assign the

costs to rural customers.70

65


Exhibit 43, ATCO Electric reply argument, paragraph 6. 67



Exhibit 38, ATCO Electric rebuttal evidence, paragraph 4. 70

Exhibit 42, UCA reply argument, paragraph 30.



76. ATCO Electric noted that it does not have a rural and non-rural tariff, as implied by the

UCA’s suggestion of allocating the costs to just rural customers. ATCO Electric also added that,

when the feeder analysis is complete, a full cost of service study will be performed and a

Phase II application will be submitted. The full cost of service study will take into account all the

changes in costs for rural and non-rural customers, functionalize the assets, classify the costs and

allocate the costs based on forecast billing determinants. The Z factor costs will be a very small

component of the total costs that will include costs associated with capital trackers and all other

capital related and non-capital costs.71 ATCO Electric also submitted that when the Z factor

amounts are allocated to only the farm rate class for the years 2013 and 2014, the resulting rate

increase would be very high and ATCO Electric does not view an increase of that magnitude as

acceptable.72

77. NPPREA and LLREA also disagreed with ATCO Electric’s proposed allocation

methodology, stating that the acquisition of the REAs is “at the expense of all ATCO Electric

customers.”73 They submitted that the cost of the purchases should be borne by the shareholders

and the customers within the REAs that are the subject of this application, because they are the

ones enjoying the benefits. The customers within the expansion area benefit because they receive

a lump sum “windfall” buy out, and only have to repay a small portion of the costs of that buy-

out over time. On the other hand, the existing customers bear the vast majority of the costs, and

receive no appreciable benefits.74 NPPREA and LLREA submitted that this outcome is

contradictory to two fundamental principles of sound regulatory practice because:75

a) The principle of fairness to ratepayers is breached, because the existing ATCO Electric

ratepayers are paying costs they do not cause, and the purchase or expansion provides

them with no appreciable benefit;

b) Utility regulation is considered to act as a surrogate to competition, and no competitive

business would be in a position to arbitrarily pass on the costs of expanding its customer

base to its existing customers, without facing competitive pressures.

78. NPPREA and LLREA also argue that ATCO Electric’s shareholders benefit as its rate

base expands.

79. ATCO Electric argued that NPPREA and the LLREA ignore the extensive evidence

provided by ATCO Electric that the purchase of an REA wishing to discontinue operations is in

the public interest, is consistent with the utility’s obligation to provide service in its service area,

and promotes the economic, orderly and efficient development of the electric system.76

5 Commission findings

80. In paragraph 525 of Decision 2012-237, the Commission stated: “The Commission

considers that all of the above criteria must be met in order for an item to qualify for a Z factor

rate adjustment.”

71




Exhibit 41, NPPREA and LLREA argument, paragraphs 6-9. 75


Exhibit 43, ATCO Electric reply argument, paragraph 29.



81. Having considered the evidence and arguments of the parties, the Commission finds that

the applicant has failed to satisfy some of the Z factor criteria to warrant an adjustment to 2013

rates on the basis of a Z factor adjustment to take into account the impact of the REA

acquisitions. In particular, the Commission considers that ATCO Electric has failed to satisfy

criterion one, namely that the impact must be attributable to an event outside management’s

control. In addition, the Commission considers that ATCO Electric has failed to satisfy criterion

two, namely that the impact of the event must be material, for all of the REA acquisitions, with

the exception of the Peace Country REA.

82. Nonetheless, the Commission has determined that the 10 REA acquisitions for which

ATCO Electric has sought an adjustment to its rates under PBR will be accounted for as an

adjustment to 2013 going-in rates and 2014 base rates for the reasons set out later in this

decision.

Criterion 1

83. The Commission finds that the application does not satisfy criterion one because ATCO

Electric has failed to demonstrate that it cannot refuse to make an offer to purchase an REA once

the REA has requested an offer. The Commission agrees with the UCA that ATCO Electric has

provided insufficient evidence to demonstrate the existence of a legal compulsion to purchase an

REA under the provisions of the Hydro and Electric Energy Act. Additionally, the Commission

agrees with the UCA that ATCO Electric has not demonstrated, in the alternative, that any of the

subject REAs would have applied for a discontinuance of service and that there would

subsequently be an order from the Commission directing the sale of their facilities to ATCO

Electric, if ATCO Electric had failed to provide an offer to purchase. Accordingly, the

Commission does not consider that the providing of an offer to purchase and the subsequent

closing of an REA acquisition constitutes an event outside of the control of ATCO Electric’s

management. The Commission notes that ATCO Electric requested Commission approval for an

amendment to the effective date for closing of the purchase of the Manning REA from April 5,

2013, to October 5, 2013, as referenced in Decision 2013-132. This change to the effective date

was necessary to take into account the requirement for Commission approval of the present

Z factor application in order to satisfy a condition precedent of the purchase. The Commission

considers that this condition precedent constitutes evidence in support of the finding that

ATCO Electric does have a level of control with respect to whether or not it concludes an REA

acquisition.

Criterion 2

84. In Decision 2012-237, the Commission considered whether materiality should be

considered on an event by event basis or if it should be applied on a cumulative basis. The

Commission determined this issue at paragraph 534 of Decision 2012-237, stating:

534. … Given the exceptional nature of a qualifying exogenous event and the equally

exceptional measure of authorizing a recovery outside of the I-X mechanism, the

Commission considers that the PBR principles require a relatively high threshold and that

this threshold should apply to each event unless otherwise permitted in exceptional

circumstances.77

77

Decision 2012-237, paragraph 534.



85. The Commission considers that in general an REA acquisition is a separate “event” as

contemplated by Decision 2012-237, and consequently the materiality criterion should ordinarily

be applied in respect of a proposed single REA acquisition. Accordingly, only the Peace County

REA acquisition at a cost of $2.7 million would ordinarily satisfy the Z factor materiality

threshold of $2.2 million for ATCO Electric. The Commission has not been persuaded to apply

the criterion on any different basis in this application.

Other Z factor criteria and conclusion

86. In light of the above findings on the first and second criteria, the Commission does not

consider it necessary to comment on whether the ATCO Electric application satisfies the

remaining Z factor criteria.

87. Having failed to satisfy two of the criteria for a Z factor adjustment, for the above

reasons, the Commission does not consider that ATCO Electric has satisfied the criteria

established by the Commission for a Z factor adjustment to its PBR rates. Accordingly, the

application for a Z factor adjustment is denied.

Base rate adjustment

88. In its application, ATCO Electric noted that it was unable to include the acquisition costs

for the 10 REA’s in its last GTA78 prior to PBR rates coming into place.79 All of the REA offers

to purchase occurred after the argument was filed for Module 180 of the proceeding for its

2011-2012 GTA. ATCO Electric also noted that it could not be aware of how REA acquisitions

would be treated under PBR until the release of Decision 2012-237 in September 2012. The last

of the 10 offers to purchase was made in April 2012, although the Manning closing date was

subsequently amended after the release of the PBR decision. ATCO Electric has also remarked

on the capital nature of the REA acquisitions and that, absent an ability to include these

acquisitions in a GTA prior to PBR rates coming into force, there must be a mechanism available

under the PBR regime to recover these REA related capital costs that are not otherwise funded

by going-in rates adjusted by the I-X mechanism. ATCO Electric stated:

Given that REA acquisitions are not addressed through the indexing mechanism, if the

Commission does not approve Z factor treatment for these acquisitions, it must then

address the acquisitions through a capital tracker or a variance of the PBR Decision in

order to provide ATCO Electric with a reasonable opportunity to recover its prudently

incurred costs.81

89. In argument, ATCO Electric noted the timing of the offers to purchase in relation to the

release of Decision 2012-237, stating:82

In addition, ATCO Electric notes that all of the purchases were made well before the

release of Decision 2012-237 and thus, well before the Commission

78

ATCO Electric Ltd. 2011-2012 Phase I Distribution Tariff 2011-2012 Transmission Facility Owner Tariff,

Application No. 1606228, Proceeding ID No. 650. This proceeding was split into two modules. Module 1 dealt

with the issue of REA acquisitions amongst other issues. 79

Exhibit1, application, paragraph 17. 80

Decision 2011-134: ATCO Electric Ltd. 2011-2012 Phase I Distribution Tariff 2011-2012 Transmission

Facility Owner Tariff, Application No. 1606228, Proceeding ID No. 650, April 13, 2011, paragraph 8. 81


Exhibit 39, ATCO Electric argument, paragraph 16.



established the five criteria used in the evaluation of an ATCO Electric Z Factor

application. ATCO Electric proceeded with these REA acquisitions based on the

fundamentals and criteria that were in place at the time these purchases were

finalized. ATCO Electric submits that these fundamentals and criteria were well

established through Commission and AEUB approvals of numerous REA

acquisitions made by ATCO Electric in the pre-PBR environment. It is inherently

unfair to the utility, therefore, and contrary to its right to a reasonable opportunity

to recover its prudent costs, to impose new rules after the transactions were

complete, which would have the effect of denying recovery of the related costs.

90. The Commission has sympathy for the above submissions of ATCO Electric. It was the

intention of the Commission in Decision 2012-237 to ensure that each company’s approved

revenue requirement be carried forward into going-in rates and subsequently adjusted by the

I-X mechanism. It was anticipated that this exercise would capture all relevant company costs

going into a PBR regime. The acquisition costs for the 10 specific REAs do not appear to have

been captured through this exercise.

91. Decision 2012-237 provided several mechanisms to ensure that unfairness did not result

as a result of the transition to PBR and the subsequent implementation of PBR rates, including

the ability for rate adjustments where it could be demonstrated that the indexing mechanism did

not provide funding to accommodate certain company costs. In addition to a Z factor adjustment,

Decision 2012-237 contemplated that PBR rates may also be adjusted by way of a Y factor, a

capital tracker or, in limited circumstances, through an adjustment to base rates.

92. In paragraph 690 of Decision 2012-237, the Commission denied ATCO Electric’s request

to treat REA acquisition costs as a Y factor flow-through amount. In order to qualify as a capital

tracker, ATCO Electric would have to satisfy the capital tracker criteria established by the

Commission. The Commission has not received a capital tracker application for the REA

acquisitions and accordingly, will not comment on whether REA acquisitions would satisfy the

capital tracker criteria. As noted in Section 4.1 above, ATCO Electric did not apply for an

adjustment to base rates in its PBR application nor in its PBR compliance filing. The

Commission considers, however, that the REA acquisition costs for the 10 specific REAs, if

prudent, are similar in nature to the types of costs allowed in Section 3 of Decision 2012-237 as

an adjustment to going-in rates because they are not an after-the-fact adjustment to reflect actual

results.

93. With respect to the prudence of the REA acquisitions, the stage one prudence, has been

or will be established in the Commission decision approving the transfer of REA facilities to

ATCO Electric.



94. With respect to the stage two prudence, concerning the purchase price, the 10 REA

purchase agreements determined the purchase price based on RCN-D. ATCO Electric submitted

that this method for determining the price for an REA has been consistently endorsed by the

Commission and its predecessors for both FortisAlberta Inc. and ATCO Electric.83 84 The

Commission accepts ATCO Electric’s submissions and finds the purchase price of RCN-D with

respect to the 10 REAs to be reasonable, in this instance. The Commission recognizes that the

AUC has previously determined that the use of RCN-D is an acceptable valuation for the

purchase of an REA by a Commission-regulated utility in certain circumstances. In the

Commission’s view, to now deny the acceptability of RCN-D in the instant case, in the face of

ample precedent that this valuation method has been accepted in the past, would be unfair to the

parties to the REA purchase agreements.

95. As detailed in paragraph 66 above and in Decision 2010-309, the RCN-D valuation

methodology is included within the current legislative construct. The RCN-D valuation

methodology has a significant and ongoing cost to ATCO Electric’s customers, as evidenced by

the $6.3 million in 2013 and $9.6 million in 2014 adjustments to rates which will continue in

future years. However, this cost that current ratepayers bear is similar under both a cost of

service and PBR framework. The PBR adjustments detailed herein are more transparent than

under cost of service in highlighting the significant costs that the legislation references.

96. Having found that the purchase prices for the 10 REAs, based on the RCN-D valuation, is

reasonable in the circumstances, the 10 REA acquisitions will be treated as an adjustment to

2013 going-in rates and 2014 base rates. Given that certain REA assets were transferred to

ATCO Electric prior to 2013 and others were forecast to be transferred in 2013, an adjustment to

2013 rates and a second adjustment to 2014 rates are required due to the use of the mid-year

convention in the revenue requirement calculation for 2013. Given the time of the year in which

the decision will be issued, the 2013 rate adjustment will be reflected by way of a one-time

adjustment to base rates in 2014. This adjustment will reflect full year revenue requirement for

acquisitions occurring prior to 2013 and a half-year revenue requirement for 2013 acquisitions in

accordance with the mid-year convention. An additional adjustment to 2014 rates will be

required to reflect a full year’s revenue requirement associated with the 2013 REA acquisitions.

This second 2014 rate adjustment will be carried forward and be subject to the I-X mechanism

for subsequent years during the PBR term. The result will be that 2014 will have the collection of

two years of revenue requirement; 2013 and 2014. Accordingly, ATCO Electric is directed to

make rate adjustments in its September 2013 annual PBR rate adjustment filing. The

implementation of the 2013 and 2014 rate adjustments shall be considered as placeholders,

subject to the securing of all remaining 2013 stage one approvals prior to December 31, 2013. If

ATCO Electric is unable to secure any of these approvals prior to that date, it shall make the

required adjustment in its September 2014 annual PBR rate adjustment filing.

83


Some of the prior decisions approving REA purchases on the basis of RCN-D are:

Decision 2011-134:ATCO Electric Ltd., 2011-2012 Phase I Distribution Tariff, 2011-2012 Transmission

Facility Owner Tariff, Application No. 1606228, Proceeding ID No.650, April 13, 2011.

Decision 2010-309: FortisAlberta Inc., 2010-2011 Distribution Tariff- Phase I, Application No. 1605170,

Proceeding ID. 212, July 6, 2010.

Decision 2003-071:ATCO Electric Ltd., 2003-3004 General Tariff Application, Rate Case Deferrals

Application, 2001 Deferral, Application no 1275494, 1275539, and 1275540, October 2, 2003.



97. The Commission agrees with ATCO Electric’s proposal to allocate the approved REA

acquisition costs across all rate payers because it is consistent with the past allocation practices.

The Commission notes that the REAs provide service to most customer classes and not just to

the farm customer class.

Future applications

98. In future, the Commission will not be amenable to further adjustment of PBR base rates

as contemplated in this decision. Now that the PBR mechanisms for rate adjustments are known

to all parties, it is incumbent on the electric distribution companies under PBR to ensure that

future applications for supplemental funding relating to REA acquisitions satisfy the

requirements of their PBR plans. Accordingly, in order to qualify for supplemental rate

treatment, an electric distribution company under PBR will have to demonstrate the REA

acquisition qualifies as a Z factor, a capital tracker or as a Y factor adjustment under the

exemption to the Y factor criteria provided for Commission-directed items in paragraph 632 of

Decision 2012-237 where the Commission stated:

632. … In addition to those Y factors that meet the above criteria, the Commission

will allow companies to recover as Y factor rate adjustments specific costs incurred at the

direction of the Commission and flow-through costs that are similar in nature to the flow-

through items approved for ENMAX in Decision 2009-035.

99. Accordingly, to qualify under the Y factor exemption for Commission directed costs, an

electric distribution company under PBR must be able to demonstrate that the REA acquisition

occurred as the result of a specific Commission direction. Such a specific Commission direction

could occur if the REA applied to the Commission for permission to cease to operate in its

service area under Section 29(1) of the Hydro and Electric Energy Act or applied to discontinue

operations of its electric distribution system under Section 30(1) of the Hydro and Electric

Energy Act. Should the application under either Section 29 or Section 30 be granted, the

Commission may, by order under Section 32(2)(a), provide for the transfer of operation of the

REA electric distribution system and related assets to the electric distribution company, and for

the payment of compensation. The Commission may also determine the amount of the

compensation payable pursuant to Section 32(2)(b) if the parties are unable to agree. The

Commission considers that a Commission order directing the transfer of facilities to an electric

distribution company, the operation of the facilities by the distribution company and the payment

of compensation to the REA may satisfy the requirements for a Commission directed Y factor

adjustment as contemplated in paragraph 632 of Decision 2012-237.



6 Order

100. It is hereby ordered that:

(1) ATCO Electric is granted approval for its REA acquisitions of an amount totalling

$119.1 million subject to obtaining all remaining stage one approvals for

2013 REA acquisitions, with a total revenue requirement of $6.3 million in 2013

and $9.6 million in 2014.

(2) ATCO Electric shall file an adjustment to its 2013 base rates of $6.3 million and

its 2014 base rates of $9.6 million as placeholders subject to obtaining all

remaining stage one approvals for 2013 REA acquisitions, as part of its

September 2013 annual PBR rate adjustment filing.

Dated on August 9, 2013.


(original signed by)

Mark Kolesar

Vice-Chair


Bill Lyttle

Commission Member


Neil Jamieson

Commission Member



Appendix 1 – Proceeding participants

Name of organization (abbreviation) counsel or representative

ATCO Electric Ltd. (ATCO Electric)

S. Parhar B. McNabb J. Janow P. Wong T. Martino N. Palladino B. Goy L. Kerckhof B. Yee

AltaLink Management Ltd. (AML)

Z. Lazic T. Kanasoot R. Pallister D. Madsen

AltaGas Utilities Inc. (AUI)

N. McKenzie C. Martin

EPCOR Distribution & Transmission Inc. (EDTI) D. Tenney

Lakeland Rural Electrification Association Limited (LLREA) A. Maranchuk

North Parkland Power Rural Electrification Association Limited (NPPREA) T. Marriott R. Daw M. Paul G. Nicol

Office of the Utilities Consumer Advocate (UCA) C. R. McCreary K. Arrowsmith

The Alberta Utilities Commission Commission Panel M. Kolesar, Vice-Chair B. Lyttle, Commission Member N. Jamieson, Commission Member Commission Staff

B. McNulty (Commission counsel) A. Sabo (Commission counsel) N. Mahbub B. Miller



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. Having found that the purchase prices for the 10 REAs, based on the RCN-D valuation, is

reasonable in the circumstances, the 10 REA acquisitions will be treated as an adjustment

to 2013 going-in rates and 2014 base rates. Given that certain REA assets were

transferred to ATCO Electric prior to 2013 and others were forecast to be transferred in

2013, an adjustment to 2013 rates and a second adjustment to 2014 rates are required due

to the use of the mid-year convention in the revenue requirement calculation for 2013.

Given the time of the year in which the decision will be issued, the 2013 rate adjustment

will be reflected by way of a one-time adjustment to base rates in 2014. This adjustment

will reflect full year revenue requirement for acquisitions occurring prior to 2013 and a

half-year revenue requirement for 2013 acquisitions in accordance with the mid-year

convention. An additional adjustment to 2014 rates will be required to reflect a full year’s

revenue requirement associated with the 2013 REA acquisitions. This second 2014 rate

adjustment will be carried forward and be subject to the I X mechanism for subsequent

years during the PBR term. The result will be that 2014 will have the collection of two

years of revenue requirement; 2013 and 2014. Accordingly, ATCO Electric is directed to

make rate adjustments in its September 2013 annual PBR rate adjustment filing. The

implementation of the 2013 and 2014 rate adjustments shall be considered as

placeholders, subject to the securing of all remaining 2013 stage one approvals prior to

December 31, 2013. If ATCO Electric is unable to secure any of these approvals prior to

that date, it shall make the required adjustment in its September 2014 annual PBR rate

adjustment filing. ............................................................................................. Paragraph 96

Decision 2013-296 ATCO Electric Ltd. - AUC · 2 • AUC Decision 2013-296 (August 9, 2013) 7. On January 25, 2013, ATCO Electric filed correspondence with the AUC requesting an extension

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