Decision 3220-D01-2015 FortisAlberta Inc.

Decision 3220-D01-2015 FortisAlberta Inc.
Decision 3220-D01-2015
FortisAlberta Inc.
2013-2015 PBR Capital Tracker Application
March 5, 2015
Alberta Utilities Commission
Decision 3220-D01-2015
FortisAlberta Inc.
2013-2015 PBR Capital Tracker Application
Proceeding 3220
Application 1610570-1
March 5, 2015
Published by the:
Alberta Utilities Commission
Fifth Avenue Place, Fourth Floor, 425 First Street S.W.
Calgary, Alberta
T2P 3L8
Telephone: 403-592-8845
Fax: 403-592-4406
Website: www.auc.ab.ca
Contents
1
Introduction ........................................................................................................................... 1
2
Background ........................................................................................................................... 2
3
Commission process for reviewing Fortis’ 2013-2015 capital tracker application ......... 6
4
Projects and programs included in the 2013-2015 application ......................................... 8
5
Grouping of projects for capital tracker purposes ............................................................ 9
5.1 Project grouping and incentives .................................................................................... 9
5.2 Fortis’ proposed grouping of projects ......................................................................... 16
6
Deferral of capital expenditures planned in 2013 ............................................................ 24
7
Project assessment under Criterion 1 – the project must be outside of the normal
course of the company’s ongoing operations .................................................................... 34
7.1 Common issues............................................................................................................ 35
7.1.1 Common elements in Fortis’ capital expenditure forecasts ............................ 35
7.1.2 Capitalized overhead and allocation ............................................................... 37
7.2 Assessment of individual projects ............................................................................... 42
7.2.1 Customer Growth program ............................................................................. 42
7.2.2 AESO Contributions program......................................................................... 47
7.2.3 Substation Associated Upgrades program ...................................................... 49
7.2.4 Distribution Line Moves program .................................................................. 59
7.2.5 Urgent Repairs program .................................................................................. 64
7.2.6 Distribution Capacity Increases program........................................................ 67
7.2.7 Worst Performing Feeders program................................................................ 72
7.2.8 Pole Management program ............................................................................. 80
7.2.8.1 Prudent Capital Maintenance and Replacement program, pole
inspections and pole testing frequency for the Pole Management
program .............................................................................................. 89
7.2.8.2 Capitalizing pole inspections ............................................................. 92
7.2.8.3 Expected service life for poles and the accounting treatment for
infrequent treatments or wraps in the Pole Management program .... 93
7.2.9 Cable Management program ........................................................................... 97
7.2.10 DCC/SCADA project.................................................................................... 102
7.2.11 Compliance, Safety, Aging Facilities and Reliability program .................... 109
7.2.12 Metering Unmetered Oilfield Services project ............................................. 117
8
Accounting test under Criterion 1 – the project must be outside of the normal course
of the company’s ongoing operations and Commission conclusion on Criterion 1 .... 120
8.1 Fortis’ accounting test model .................................................................................... 120
8.2 I-X index and Q factor used in the accounting test ................................................... 122
8.3 WACC rate ................................................................................................................ 124
8.4 Commission’s conclusions on Criterion 1................................................................. 124
9
Criterion 2 – ordinarily the project must be for replacement of existing capital assets
or undertaking the project must be required by an external party ............................. 125
Decision 3220-D01-2015 (March 5, 2015) • i
10 Criterion 3 – the project must have a material effect on the company’s finances ...... 128
11 Other matters .................................................................................................................... 130
11.1 Controls and accountability ....................................................................................... 130
11.2 Rule 005: reporting of returns ................................................................................... 131
11.3 Minimum capitalization threshold............................................................................. 131
11.4 Requirement that in the absence of the proposed capital expenditures, deterioration in
service quality and safety would result ..................................................................... 132
11.5 2012 actual capital additions in the 2013 K factor calculation ................................. 134
12 K factor calculation ........................................................................................................... 139
13 Order .................................................................................................................................. 141
Appendix 1 – Proceeding participants .................................................................................... 143
Appendix 2 – Oral hearing – registered appearances ........................................................... 144
Appendix 3 – Summary of Commission directions ................................................................ 145
List of tables
Table 1.
Applied-for 2013-2015 capital tracker projects or programs ................................. 8
Table 2.
The CCA’s example of mixing various DTA levels of projects ............................ 11
Table 3.
Accounting test analysis for a disaggregated distribution capacity increases
program ..................................................................................................................... 19
Table 4.
2013 capital expenditures deferred due to capital tracker treatment uncertainty
..................................................................................................................................... 25
Table 5.
Common assumptions in Fortis’ 2014-2015 capital forecasts ............................... 36
Table 6.
Alberta economic indicators .................................................................................... 42
Table 7.
Number of new service connections and the percentage change .......................... 43
Table 8.
Capital costs per unit to connect new customers ................................................... 43
Table 9.
Customer Growth program capital expenditures summary ................................ 44
Table 10. Customer Growth program - net capital expenditures and additions ................. 44
Table 11. Customer Growth program – expenditure variances by year .............................. 45
Table 12. Substation Associated Upgrades program net capital additions .......................... 51
Table 13. 2013 Substation Associated Upgrades program actual and forecast costs .......... 51
Table 14. 2014 Substation Associated Upgrades projects ...................................................... 53
ii • Decision 3220-D01-2015 (March 5, 2015)
Table 15. 2015 Substation Associated Upgrade projects ....................................................... 54
Table 16. Distribution Line Moves program capital expenditures ....................................... 60
Table 17. 2013-2015 Distribution Line Moves program net capital additions..................... 61
Table 18. 2013-2015 Distribution Line Moves program capital expenditures and
contributions.............................................................................................................. 62
Table 19. 2013-2015 Distribution Line Moves program capital expenditures by third party
..................................................................................................................................... 62
Table 20. Urgent Repairs program – units and expenditures ............................................... 65
Table 21. Cost per unit of replacement .................................................................................... 65
Table 22. Urgent Repairs program capital expenditures summary ..................................... 66
Table 23. Distribution Capacity Increases program net capital additions........................... 68
Table 24. Distribution Capacity Increases program capital expenditures ........................... 69
Table 25. Distribution Capacity Increases program capital expenditures ........................... 70
Table 26. Distribution Capacity Increases program capital expenditure variances and
explanations ............................................................................................................... 70
Table 27. Capital expenditures and capital additions associated with the Worst
Performing Feeders program .................................................................................. 74
Table 28. 2013-2015 Pole Management program capital expenditures ................................ 81
Table 29. 2013-2015 Pole Replacements and Life Extension ................................................. 82
Table 30. 2013-2015 Pole Replacements and Life Extension unit costs ................................ 82
Table 31. Pole Management program net capital additions .................................................. 83
Table 32. 2013 Cable Management project list – actual ...................................................... 100
Table 33. 2014 Cable Management project list – forecast ................................................... 101
Table 34. Cable Management program net capital additions ............................................. 101
Table 35. 2012-2015 capital expenditures for the DCC/SCADA project ........................... 104
Table 36. Net Capital Additions for the DCC/SCADA project ........................................... 104
Table 37. Forecast method for the CSAR program initiatives ............................................ 112
Table 38. 2012-2015 capital expenditures for the CSAR program ..................................... 113
Table 39. Net capital additions for the CSAR program ....................................................... 114
Decision 3220-D01-2015 (March 5, 2015) • iii
Table 40. Metering Unmetered Oilfield Services project net capital additions................. 117
Table 41. Applied-for 2013-2015 capital tracker projects or programs and Criterion 2
requirements ............................................................................................................ 126
iv • Decision 3220-D01-2015 (March 5, 2015)
Alberta Utilities Commission
Calgary, Alberta
FortisAlberta Inc.
2013-2015 PBR Capital Tracker Application
1
Decision 3220-D01-2015
Proceeding 3220
Application 1610570-1
Introduction
1.
FortisAlberta Inc. (Fortis, FortisAlberta or FAI) is subject to a performance-based
regulation (PBR) pursuant to a plan approved by the Alberta Utilities Commission in
Decision 2012-237.1 Decision 2012-237 provided for an annual rate adjustment formula that
included the possibility of additional funding of a portion of the revenue requirement associated
with capital projects or programs that satisfied certain specified criteria. If approved by the
Commission, these projects or programs would be afforded “capital tracker” treatment and the
approved portion of revenue requirement for these projects and programs would be recovered
through the K factor portion of the PBR rate adjustment formula.
2.
In Decision 2013-435,2 the Commission denied Fortis’ application for capital tracker
treatment of certain projects and programs in 2013 on the basis of certain deficiencies. The
Commission directed Fortis to file a capital tracker refiling and true-up application correcting the
deficiencies and using actual capital expenditures for those projects or programs the company
proposes for 2013 capital tracker treatment.3
3.
In a letter of February 3, 2014, the Commission further directed Fortis to file a single
application on or before May 15, 2014 that includes the 2013 capital tracker refiling and true-up,
as well as the company’s 2014 capital tracker forecast, and 2015 capital tracker forecast.4
4.
Consistent with the Commission’s directions, Fortis filed an application with the
Commission on May 15, 2014. The application sought capital tracker treatment for those projects
and programs identified in the 2013 capital tracker refiling and true-up portion of the application,
as well as the projects and programs identified in capital tracker forecasts for 2014 and 2015.
The Commission assigned Proceeding 3220 to the application. Fortis further requested that the
associated revenue requirement for the capital tracker projects would be included, in the
applicable year, in the K factor component of the PBR rate formula approved in Decision 2012237.
5.
On May 16, 2014, the Commission issued a notice of application that required interested
parties to submit a statement of intent to participate (SIP) by May 26, 2014. In their SIPs, parties
were to indicate whether they supported or objected to the application, the reasons for their
positions, and the need for further process with supporting rationale.
1
2
3
4
Decision 2012-237: Rate Regulation Initiative, Distribution Performance-Based Regulation, Proceeding 566,
Application 1606029,September 12, 2012.
Decision 2013-435: Distribution Performance-Based Regulation 2013 Capital Tracker Applications,
Proceeding 2131, Application 1608827, December 6, 2013.
Decision 2013-435, paragraph 1069.
Proceeding 2131, Exhibit 286.01.
Decision 3220-D01-2015 (March 5, 2015) • 1
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
6.
The Commission received SIPs from AltaLink Management Ltd. (AltaLink), AltaGas
Utilities Inc. (AltaGas or AUI), ATCO Electric Ltd., ATCO Gas, a division of ATCO Gas and
Pipelines Ltd., EPCOR Distribution & Transmission Inc. (EPCOR or EDTI), the Consumers’
Coalition of Alberta (CCA) and the Office of the Utilities Consumer Advocate (UCA). Only the
CCA and the UCA actively participated in the proceeding.
7.
After reviewing the application and the SIPs, the Commission determined that the
application would be considered by way of a full process proceeding that involves information
requests (IRs), intervener evidence and an oral hearing among other procedural steps as set out
below.
8.
The process schedule for Fortis’ 2013-2015 capital tracker application was as follows:
Process step
IRs to Fortis
IR responses from Fortis
Intervener evidence
IRs to interveners
Intervener IR responses
Rebuttal evidence round 1
Oral hearing
Argument
Reply argument
Deadline
June 17, 2014
July 8, 2014
July 28, 2014
August 11, 2014
August 25, 2014
September 8, 2014
October 20, 2014 to October 31, 2014
November 21, 2014
December 5, 2014
9.
The Commission considers the record of the proceeding to have closed on December 5,
2014, when reply arguments were filed. In reaching the determinations set out within this
decision, the Commission has considered all relevant materials comprising the record of
proceeding 3220, as well as the record for Decision 2013-435. Accordingly, reference in this
decision to specific parts of the records 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 records with respect to a
particular matter.
2
Background
10.
On September 12, 2012, the Commission issued Decision 2012-237, approving PBR
plans for the distribution utility services of certain Alberta electric and gas companies, including
Fortis. The PBR plans were approved for a five-year term commencing January 1, 2013. PBR
replaces traditional cost-of-service regulation as the annual rate-setting mechanism for
distribution utility rates.
11.
As set out in Decision 2012-237, the PBR framework provides a formula mechanism for
the annual adjustment of rates for those companies under an approved PBR plan. In general, the
rates are adjusted annually by means of an indexing mechanism that tracks the rate of
inflation (I) relevant to the prices of inputs the companies use less an offset (X) to reflect the
productivity improvements the company can be expected to achieve during the PBR plan period.
As a result, with the exception of specifically approved adjustments, a utility’s revenues are no
longer linked to its costs. Companies subject to a PBR regime must manage their businesses and
2 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
service obligations with the revenues derived under the PBR indexing mechanism and
adjustments provided for in the formula. The PBR framework is intended to provide incentives
for productivity increases and cost savings similar to those operating in competitive markets.
12.
A company may apply for approval for certain rate adjustments to enable the recovery of
specific costs where it can be demonstrated that the costs cannot be recovered under the I-X
mechanism and where certain other criteria have been satisfied. These possible adjustments
include an adjustment to fund necessary capital expenditures (a K factor), an adjustment for
certain flow-through costs that should be recovered from, or refunded to, customers directly (a
Y factor), or an adjustment to account for the effect of material exogenous events for which the
company has no other reasonable cost recovery or refund mechanism within the PBR plan
(a Z factor).
13.
In Decision 2012-237, the Commission determined that a mechanism to fund certain
capital-related costs may be required under the approved PBR plans.5 This supplemental funding
mechanism was referred to in Decision 2012-237 as a “capital tracker” with the revenue
requirement associated with approved amounts to be collected from ratepayers by way of a
“K factor” adjustment to the annual PBR rate setting formula.
14.
At paragraph 592 of Decision 2012-237, the Commission set out three criteria that any
capital project or program would have to satisfy in order to receive capital tracker treatment:
(1) The project must be outside of the normal course of the company’s ongoing
operations.
(2) Ordinarily the project must be for replacement of existing capital assets or
undertaking the project must be required by an external party.
(3) The project must have a material effect on the company’s finances.
15.
Further, at paragraph 593 of Decision 2012-237, the Commission indicated that the party
recommending the capital tracker must demonstrate that all of the criteria have been satisfied in
order for a capital project or program to receive consideration as a capital tracker.
16.
The implementation and application of the above capital tracker criteria were considered
as part of the 2013 capital trackers Proceeding 2131, leading to Decision 2013-435.6 The
Commission indicated that the implementation methodology established in that decision will be
used not only to evaluate the capital tracker projects or programs proposed by the parties for
2013, but also for subsequent capital tracker applications throughout the PBR term.7
17.
With respect to the first capital tracker criterion, the Commission concluded that, in
general, in order for a capital project or program to be considered outside of the normal course of
the company’s ongoing operations, the increase in associated revenue provided under the I-X
mechanism would not be sufficient to recover the entire revenue requirement associated with the
prudent capital expenditures for this project or program. Accordingly, the Commission found
that the concept of normal course is mainly a financial and accounting consideration, rather than
strictly an engineering consideration. The Commission referred to this comparison of revenues as
5
6
7
Decision 2012-237, paragraph 586.
Decision 2013-435, Section 3.
Decision 2013-435, paragraph 120.
Decision 3220-D01-2015 (March 5, 2015) • 3
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
the “accounting test” under Criterion 1. At the same time, the Commission indicated an
engineering study and a business case will aid the Commission in assessing whether a project
proposed for capital tracker treatment is (i) required to provide utility service at adequate levels
and, if so, (ii) that the scope, level and timing of the project are prudent, and the forecast or
actual costs of the project are reasonable. The Commission referred to this assessment as the
“project assessment” under Criterion 1. Therefore, the applicant must satisfy the Commission’s
requirements for both the accounting test and the project assessment in order to satisfy the
requirements of Criterion 1.8
18.
Regarding the accounting test component of Criterion 1, the Commission determined that
this test should be based on the project net cost approach, under which the revenue generated
under the I-X mechanism for each capital project (or capital program or project category) is
compared to the forecast revenue requirement associated with that capital project (or capital
program or project category) in a PBR year. No consideration of operating and maintenance
costs or savings and potential productivity offsets above those implied by the approved X factor
is required for the accounting test.
19.
For purposes of the project assessment, the Commission determined that each project or
program proposed for capital tracker treatment must generally be supported by a business case
and an engineering study. However, the Commission recognized that in some circumstances, an
engineering study may not be required. In Section 10.2 of Decision 2013-435, the Commission
found that for the purpose of the project assessment, a project or program proposed for capital
tracker treatment typically should address the following:
a. The rationale for the project, including the nature, scope, location, timing and cost of
the project.
b. Any context for the project, which may include related past, present and future plans
(e.g., for multi-year capital expenditures).
c. Evidence demonstrating that in the absence of the proposed capital expenditures,
deterioration in service quality and safety would result.
d. Qualitative and, to the extent possible, quantitative descriptions of the service quality
and safety risks addressed by the project.
e. Evidence that the capital project could not have been undertaken in the past as part of
a prudent capital maintenance and replacement program.
f. A discussion of any reasonable alternatives, including the rationale for
recommending the proposed solution.
g. A detailed forecast of costs for the project or project components, in sufficient detail
to allow an evaluation of the reasonableness of the forecast.
h. A comparison of actual expenditures to forecast expenditures on similar projects over
at least the previous five years, if available, including an explanation of any
differences.
i. With respect to proposed capital trackers, an explanation of any differences between
the forecast costs of projects proposed for capital tracker treatment and the actual or
updated forecast costs of similar projects undertaken in the prior year. This
explanation should provide a breakdown of the project costs that includes both units
and costs-per-unit on a forecast and actual or updated forecast basis.
j. With respect to the true-up of capital tracker projects, an explanation of any
differences between the forecast costs of projects approved for capital tracker
treatment and the actual cost of these projects undertaken in the prior year. This
8
Decision 2013-435, paragraphs 149-150.
4 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
explanation should provide a breakdown of the project costs that includes both units
and costs-per-unit on a forecast and actual basis.9
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. The Commission further clarified at paragraph 48 of
Decision 2013-435:
48.
It was acknowledged by the Commission that superior incentives for capital
trackers would result if the companies were required to spend money on capital
expenditures prior to receiving approval for capital tracker recovery of the expenditures.
However, given the lack of experience with the capital tracker mechanism, for the first
generation PBR plans, it was determined that the companies will be permitted to apply
for capital trackers on a forecast basis. The approved forecast cost of a capital tracker
project will be included in rates on an interim basis and will be subject to a true-up to
prudently incurred actual expenditures, after the project is completed. The true-up
process will test the prudence of the actual capital expenditures and imprudent
expenditures will be subject to disallowance. As a result, the capital tracker mechanism
retains some efficiency incentives due to the risk of regulatory disallowances in the trueup process if expenditures are not prudently incurred. The true-up mechanism with a
prudence review also mitigates somewhat the incentive for companies to overstate the
initial capital tracker forecasts. Nonetheless, the companies remained free to incur
expenditures prior to applying for capital tracker approval. [footnotes removed]
21.
With respect to Criterion 2, in Decision 2013-435, the Commission clarified that, in
addition to asset replacement projects and projects required by an external party, in principle, a
growth-related project will satisfy the requirements of Criterion 2 where it can be demonstrated
that customer contributions, together with incremental revenues allocated to the project on some
reasonable basis, when added to the revenue provided under the I-X mechanism, are insufficient
to offset the revenue requirement associated with the project in a PBR year.10 Criterion 2 also
permits consideration of certain projects for capital tracker treatment that do not fall into any of
the growth-related, asset replacement or external party related categories.
22.
Under Criterion 3, the Commission determined that applying the materiality threshold to
that portion of the revenue requirement for a project that is not funded under the I-X mechanism
is warranted. The Commission established a two-tier materiality threshold. The first tier of the
materiality threshold, a “four basis point threshold,” is to be applied at a project level (grouped in
the manner approved by the Commission). The second tier of the materiality threshold, a
“40 basis point threshold,” is to be applied to the aggregate revenue requirement proposed to be
recovered by way of all capital trackers.
23.
Additionally, the Commission recognized the significance of the grouping of projects
proposed for capital tracker treatment when it stated in paragraph 601 of Decision 2012-237:
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.
9
10
Decision 2013-435, paragraph 1092.
Decision 2013-435, paragraph 309.
Decision 3220-D01-2015 (March 5, 2015) • 5
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
24.
In Decision 2013-435, the Commission further elaborated that grouping of projects will
require close scrutiny, since it will have a direct effect on the results of the accounting test and
the project assessment under Criterion 1, as well as the assessment of materiality under
Criterion 3. The Commission determined that the reasonableness of the grouping of capital
projects is best assessed on a case-by-case basis for each individual company. The Commission
indicated that it will require each company to provide a justification for its proposed grouping of
projects for capital tracker treatment.11
25.
Finally, in Section 4.4 of Decision 2013-435, the Commission set out the K factor
calculation methodology. The Commission determined that basing the K factor calculations on
the incremental revenue requirement amounts (i.e., above the amounts provided under the
I-X mechanism) for each project or program proposed for capital tracker treatment, as is done
under the project net cost approach, is commensurate with the Commission’s definition of
outside the normal course of the company’s ongoing operations.
3
Commission process for reviewing Fortis’ 2013-2015 capital tracker application
26.
In Decision 2013-435, the Commission did not approve any of the projects proposed by
Fortis for capital tracker treatment for 2013 at that time because Fortis did not use a project net
cost approach in its 2013 capital tracker forecast application. However, in that decision, the
Commission did consider, for purposes of providing additional guidance on the programs and
projects applied for, whether those programs and projects were properly grouped and complied
with the requirements of the project assessment component of Criterion 1 and the requirement of
Criterion 2.12 As a result of this project assessment, the Commission accepted the need for some
projects put forward in Fortis’ 2013 capital tracker forecast application to maintain service
quality at adequate levels.
27.
In Decision 2013-435, the Commission directed Fortis to file a capital tracker refiling and
true-up application based on a project net cost approach using 2013 actual capital expenditures
for those projects or programs the company proposes for 2013 capital tracker treatment.13 In its
letter of February 3, 2014, the Commission further directed Fortis to file a single application on
or before May 15, 2014 that includes the 2013 capital tracker refiling and true-up, the 2014
capital tracker forecast, and the 2015 capital tracker forecast.14 Consistent with these directions,
Fortis’ 2013-2015 capital tracker application includes the 2013 capital tracker refiling and trueup based on the 2013 actual capital expenditures, the 2014 capital tracker forecast, and the 2015
capital tracker forecast.
28.
In the remainder of this decision, the Commission assesses the company’s 2013 refiling
and true-up and 2014-2015 forecast capital tracker requests. With respect to the true-up of the
2013 capital tracker projects, the Commission stated that the application:
975.
… shall true-up the costs of projects that have been completed since the prior
year‘s capital tracker filing together with sufficient information to permit a prudence
11
12
13
14
Decision 2013-435, paragraphs 403 and 406.
Decision 2013-435, paragraph 993.
Decision 2013-435, paragraph 1069.
Proceeding 2131, Exhibit 286.01.
6 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
review of these completed projects. To facilitate a prudence review of a project, the
company must submit information showing that it has completed the project in the most
cost effective manner possible. This information will include the results of competitive
bidding processes, comparisons of in-house resources to external resources, and any other
evidence that may be of assistance in demonstrating the prudence of the expenditures.15
29.
Consistent with these determinations, the Commission considers that for the purposes of
the true-up of the 2013 capital tracker projects for which the Commission confirmed the need as
part of its project assessment in Decision 2013-435, if there is no evidence on the record of the
true-up proceeding demonstrating that a project was not required in 2013, then there is no need
to demonstrate that a project was needed in order to provide utility service at adequate levels in
2013. However, the second part of the project assessment under Criterion 1 is still required so
that the Commission can be satisfied that the scope, level and timing of each project was prudent,
and the actual costs of the project were prudently incurred.
30.
The Commission also considers that for the purposes of the true-up of the 2013 capital
tracker projects or programs for which the Commission undertook the assessment against the
Criterion 2 requirements in Decision 2013-435, unless the driver for the project or program has
changed, there is no need to undertake a reassessment against the Criterion 2 requirements.
However, the Commission will undertake an assessment with respect to Criterion 3.
31.
For any new projects in 2013 not previously evaluated in Decision 2013-435, the
Commission will undertake assessments with respect to all three criteria for capital tracker
treatment, including the need for the project.
32.
With respect to forecast capital projects for 2014 and 2015 for which the company is
seeking capital tracker treatment, the Commission will generally undertake assessments with
respect to all three criteria for capital tracker treatment. However, in those instances where a
project or program is part of an ongoing multi-year program, or if a project or program is of an
annual recurring nature (e.g., relocations) for which the need has been previously approved by
the Commission for purposes of capital tracker treatment, in the absence of evidence that the
ongoing or recurring project or program is no longer required, the Commission will not
undertake a reassessment of need under Criterion 1. However, the Commission will undertake
assessments with respect to all remaining aspects of the three criteria for capital tracker
treatment.
33.
Section 4 of this decision provides an overview of the projects and programs for which
Fortis is seeking capital tracker treatment in 2013, 2014 and 2015. The evaluation of Fortis’
proposed capital project groupings is set out in Section 5. Section 6 deals with Fortis’ decision to
defer some expenditures on capital tracker projects planned in 2013. The assessment of how
Fortis’ projects or programs proposed for capital tracker treatment satisfy Criterion 1 is set out in
sections 7 and 8 dealing with the project assessment and the accounting test, respectively. The
assessment under Criterion 2 is undertaken in Section 9 and the assessment under Criterion 3 is
set out in Section 10. Section 11 deals with other matters raised throughout the proceeding.
Finally, Section 12 deals with the K factor calculation.
15
Decision 2012-237, paragraph 975.
Decision 3220-D01-2015 (March 5, 2015) • 7
2013-2015 PBR Capital Tracker Application
4
FortisAlberta Inc.
Projects and programs included in the 2013-2015 application
34.
Fortis applied for nine capital tracker programs for 2013 and an additional three for 2014
and 2015. The following table lists the applied-for projects or programs, the dollars to be
recovered by way of the K factor and the percentage of the project or program revenue
requirement proposed to be recovered by the K factor.
Table 1.
Applied-for 2013-2015 capital tracker projects or programs
Item
K factor $ (million) and percentage of total
revenue requirement
2013
2014
2015
8.2
19.6
28.2
Customer Growth program
AESO Contributions program
8%
7.6
16%
12.4
21%
17.2
24%
2.0
33%
3.9
39%
4.8
18%
1.1
30%
2.3
34%
3.1
9%
0.9
17%
1.7
21%
2.1
6%
-
10%
0.6
12%
1.3
-
4%
0.6
8%
1.0
1.2
16%
2.8
24%
5.2
7%
-
14%
0.4
23%
1.0
0.8
31%
2.0
53%
2.4
53%
0.7
71%
1.2
75%
1.7
7%
0.5
11%
0.5
14%
0.9
22%
22%
33%
Substation Associated Upgrades program
Distribution Line Moves program
Urgent Repairs program
Distribution Capacity Increases program
Worst Performing Feeders program
Pole Management program
Cable Management program
Distribution Control Centre/SCADA project
Compliance, Safety, Aging Facilities, and Reliability
program
Metering Unmetered Oilfield Services project
8 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
Item
FortisAlberta Inc.
K factor $ (million) and percentage of total
revenue requirement
2013
2014
2015
$23.2
$48.1
$68.9
Total
11%
5
19%
24%
Grouping of projects for capital tracker purposes
35.
In Decision 2013-435, the Commission determined that the accounting test and the first
tier of the materiality test (Criterion 3) will be applied to the approved groupings (i.e., either at a
project or at a program level). The Commission also indicated that while the project assessment
will generally be applied at the level of an approved grouping of projects, the Commission will,
where necessary, consider the individual component projects comprising the approved groupings
in order to assess the need for the capital additions and the reasonableness of the forecast costs.
The second tier of the materiality test will be applied at the level of all capital tracker projects, in
the aggregate.16 The Commission also determined that the reasonableness of the grouping of
capital projects is best assessed on a case-by-case basis for each company.17
36.
In Decision 2013-435, the Commission made several findings with respect to Fortis’
groupings. The Commission accepted the grouping of the customer growth program, finding that
the nature of the capital additions in each customer growth category are sufficiently similar to be
grouped together.18 The Commission also accepted the grouping of the DCC/SCADA project,
stating that “with respect to the DCC/SCADA project, the Commission finds that this is a unique
and substantial project and, accordingly, the Commission will accept the grouping of this project
for the purpose of this decision.”19 The Commission did not accept Fortis’ aggregated grouping
of the “externally driven” category, finding that the aggregated grouping should be disaggregated
into separate groups for the Alberta Electric System Operator (AESO) contributions, substation
associated upgrades, IPP interconnections and distribution line moves. The Commission
considered that the disaggregated, externally driven groups would result in groupings that have
projects that are similar in nature and are consistent with historical project classifications in costof-service applications and, therefore, would allow for a more meaningful application of the
accounting test and the materiality test.20
37.
In these proceedings, the discussion of Fortis’ proposed grouping of projects for capital
tracker purposes was centered on two issues. The first issue, discussed in Section 5.1 below,
relates to the CCA’s submission with respect to the relationship between the grouping of projects
and a company’s earnings under the approved PBR plans and the resulting incentives. The
second issue, discussed in Section 5.2, focused on the organization of Fortis’ proposed
groupings.
5.1
Project grouping and incentives
38.
In its argument, the CCA discussed the issue of project grouping for capital tracker
purposes and how grouping of trackers can affect incentives and a company’s net income and
16
17
18
19
20
Decision 2013-435, paragraph 407.
Decision 2013-435, paragraph 406.
Decision 2013-435, paragraph 1002.
Decision 2013-435, paragraph 1003.
Decision 2013-435, paragraph 1001.
Decision 3220-D01-2015 (March 5, 2015) • 9
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
return on equity (ROE). The CCA submitted that a company under PBR is encouraged to group
its capital projects in a manner so as to qualify for capital tracker treatment and, thereby, increase
overall revenues and ROE. The CCA argued that Fortis “changed its grouping of projects from
its historic usage to artificially create isolated negative accounting tests which would not have
existed had the old classifications been used.”21 As a consequence of this change in approach to
grouping, the CCA supported a reduction in the number of trackers used by Fortis. The CCA
recommended the following grouping principle:
Since the groupings are relatively arbitrary and changing from past groupings, a higher
principle should prevail, and that should be that the lowest cost to customer grouping
should prevail. Just as customers should have to pay the lower of cost or market, so too
should customers have to pay for the lowest cost grouping arrangement as determined by
the accounting test. By definition, the accounting test provides the allowed return set by
the Generic Cost of Capital Decision(s). To do otherwise is violating the no-harm test.22
39.
In referring to the “no harm test,” the CCA is extrapolating from the Commission’s
traditional use of a “no harm test” in assessing an application for consent to an asset disposition
or utility purchase or reorganization. The CCA submitted that the test should be applied by the
Commission when considering the manner in which Fortis groups its projects and programs for
capital tracker treatment. Mr. Thygesen explained:
So by regrouping, the company is still providing the same service. Customers are still
getting the same service. So then at that point, I think the issue of harm to customers
comes about. And that’s when I think then you need [to] ask the question: Why should
customers pay more just because of a bookkeeping exercise where they put something in
one box as opposed to another? And the reciprocal to that is the company is not harmed
because their revenue requirement doesn’t go below what they need.23
40.
The CCA considered that Fortis utilized a more granular level of grouping in its capital
tracker application compared to what it had historically done under cost-of-service, which
resulted in project or program groupings with negative accounting tests being separated from
groupings with positive accounting tests. In other words, the granularity applied by Fortis in
grouping capital projects or programs for capital tracker purposes allowed Fortis to isolate
capital projects and programs that failed the accounting test from projects or programs that
passed the accounting test, even if these projects and programs had been grouped together in
prior rate proceedings. The net effect of grouping projects and programs in this manner was to
increase the number of projects and programs that qualified for capital tracker treatment and to
increase the amounts collected under the K factor.
41.
The CCA provided an analysis that identified four tiers of grouping that existed in Fortis’
last distribution tariff application (DTA, alternatively referred to as general tariff application or
GTA) (Proceeding 1147). The first tier of groupings was at a high level. In each successive tier,
the higher-level groupings were disaggregated into more granular groups of projects or
programs.24 As an example of how the groupings for Fortis utilized different tiers of granularity,
the CCA provided the following table:
21
22
23
24
Exhibit 3220-X0004, CCA argument, paragraph 125.
Exhibit 3220-X0004, CCA argument, paragraph 124.
Transcript, Volume 5, pages 811-814 (Mr. Thygesen).
Exhibit 3220-X0008, CCA reply argument, table following paragraph 8.
10 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
Table 2.
Tier 1
Tier 2
Tier 3
Tier 4
FortisAlberta Inc.
The CCA’s example of mixing various DTA levels of projects25
Customer growth
Nothing below
AESO contributions
Nothing below
Sustainment capital
Distribution planned maintenance
Preventative maintenance
Cable management
42.
The CCA stated that, in its capital tracker application, “Fortis has gone to the lowest level
groupings that existed in the prior GTA.”26 As a result of grouping projects at the lowest level
used in the prior GTA, Fortis was able to avoid aggregating projects that would have a negative
accounting test result with those having a positive accounting test result had the projects been
grouped at a higher tier. The CCA considered that the result of the grouping selected by Fortis
was as follows:
The immediate impact on January 1, 2013 of Fortis moving the negative accounting tests
out of the positive accounting test groupings is to escalate rates significantly through no
more than a bookkeeping change. This is simply a windfall gain to Fortis. The windfall
results from a mismatch between the policies and assumptions used in the determination
of going in rates and the determination of the K factor.27
43.
The CCA also took issue with the negative accounting test results associated with Fortis’
Automated Metering Infrastructure (AMI) program, which was implemented prior to the onset of
PBR, not being used to offset the positive accounting test results for other projects and programs.
The CCA noted that the program was included in the negotiated settlement agreement (NSA)
that set Fortis’ rates for 2012. These rates were also used as the basis for the going-in rates to
Fortis’ PBR plan. The CCA considered:
… this project was predicated on an assumption that customers would fund the upfront
capital costs and would reap the benefits of that investment over an extended period of
time. Without that agreement between customers and Fortis – and in this case it was an
explicit agreement between customers and the company – the AMI project would not
have proceeded; at a minimum it would not have proceeded as a result of a negotiated
settlement agreement.28
44.
The CCA considered that in not sharing the benefits of the negative accounting test
associated with the AMI program, Fortis has broken the explicit agreement with customers to
share the benefits of the program, resulting in a windfall gain for Fortis.29
45.
The CCA proposed some specific modifications to the groupings for Fortis aimed at
addressing many of the concerns mentioned above. The specific recommendations are discussed
in more detail in Section 5.2. However, the CCA considered that even if its recommendations are
adopted, there would still be many negative capital trackers. To counteract the harm the CCA
claimed would result from negative capital trackers, it proposed the inclusion of a threshold on
negative capital trackers. If a negative capital tracker is beyond the threshold level, the CCA
25
26
27
28
29
Exhibit 3220-X0008, CCA reply argument, table following paragraph 4.
Exhibit 3220-X0008, CCA reply argument, paragraph 8.
Exhibit 3220-X0004, CCA argument, paragraph 131.
Exhibit 3220-X0004, CCA argument, paragraph 132.
Exhibit 3220-X0004, CCA argument, paragraph 132.
Decision 3220-D01-2015 (March 5, 2015) • 11
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
proposed that the negative amount in excess of the threshold be applied against positive capital
trackers or saved to offset future expected expenditures.30
46.
Fortis expressed its view that the CCA imported into argument evidence that was not part
of the record of the proceeding, and Fortis found this to be objectionable.31 Fortis considered that
the only program grouping actually challenged by the CCA in properly admissible evidence was
the DCC/SCADA project.32 Fortis stated that the Commission must reject the majority of the
analysis presented by the CCA in its argument because of procedural fairness issues, stating:
FortisAlberta’s witnesses did not have the opportunity to assess and dispute the nature
and details of the so-called ‘4-Tier structure analysis’ presented in argument by the CCA
(and based on the CCA’s interpretation of selective materials from an earlier proceeding).
In addition, the CCA studiously avoided dealing with the merits of what was in fact in
evidence in this Proceeding, including and specifically Exhibit 109.01, which set out the
approach that actually had been used in the proceeding that established Going-in Rates
for FortisAlberta. Exhibit 109.01 shows the programs and projects that in fact formed
part of the last FortisAlberta Distribution Tariff Application (DTA). The CCA proposals
under the so-called 4-Tier approach would amount to little more than reversing the
Commission directions and determinations on groupings for tracker purposes in Decision
2013-435, and strategically ‘aggregating up’.33
47.
In response to the CCA’s proposal to use a tier of grouping that aggregates projects and
programs into broader groups, Fortis considered that the Commission previously ruled on this
approach in Decision 2013-435, and expressly told Fortis to disaggregate externally driven
projects for the purpose of capital tracker groupings.34 In Decision 2013-435, the Commission
made the following statement about the grouping of the externally driven category:
In the Commission’s view, the externally driven category should be disaggregated into
the following individual programs for capital tracker treatment: AESO contributions,
substation associated upgrades, IPP inter connection and distribution line moves, because
the projects in these individual programs would be of a similar nature and are consistent
with historical project classifications in cost-of-service applications. Additionally, this
grouping would allow for a more meaningful application of the accounting test and
materiality test.35
48.
Fortis considered that it followed the instruction to disaggregate the externally driven
grouping, and used this as guidance for the development of the other groupings presented in its
application.36
49.
Fortis stated that it does not manage its capital program on the basis of the tiers proposed
by the CCA. Fortis manages its capital program on the basis of the “specific projects and
programs presented within past DTAs and presented here as Capital Trackers.”37
30
31
32
33
34
35
36
37
Exhibit 3220-X0004, CCA argument, paragraph 138.
Exhibit 3220-X0005, Fortis reply argument, paragraph 46.
Exhibit 3220-X0005, Fortis reply argument, paragraph 50.
Exhibit 3220-X0005, Fortis reply argument, paragraph 48.
Exhibit 3220-X0005, Fortis reply argument, paragraph 65.
Decision 2013-435, paragraph 1001.
Exhibit 3220-X0005, Fortis reply argument, paragraph 66.
Exhibit 3220-X0005, Fortis reply argument, paragraph 72.
12 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
50.
With respect to the CCA’s argument to modify the grouping by aggregating more
projects and programs into higher level groupings, which would have the effect of offsetting
some projects or programs with positive accounting tests with other projects or programs
sustaining a negative accounting test, Fortis considered that this was consistent with the CCA’s
focus on negative capital trackers. In its initial evidence, the CCA included evidence on the
inclusion of negative capital trackers as part of the overall K factor for the company. Fortis filed
a motion to strike the evidence on negative capital trackers on the basis that the Commission had
previously ruled on the exclusion of negative capital trackers from K factor calculations in
Decision 2013-435. The Commission granted Fortis’ motion to strike the evidence of the CCA
related to negative capital trackers.38
51.
Fortis objected to the grouping principle presented by the CCA in argument that “the
lowest cost to customer grouping should prevail” stating:
This approach is no more than a request by the CCA that the Commission abandon
application of the guidance and earlier determinations on grouping, and instead embark
upon an exercise of strategic groupings where financial results drive the process.”39
52.
With respect to the CCA’s position that Fortis was not adequately sharing the benefits of
the AMI program, Fortis considered that the operating cost savings and other matters detailed in
the original business case for the project justified the approval and implementation of the AMI
program, and that these savings were incorporated into going-in rates, and continue to be passed
on to customers.40 Fortis stated that “under either COS or PBR, customers would continue to
fund the costs of the FortisAlberta AMR [referred to elsewhere as AMI] program and gain the
benefits that justified the incurrence of those costs, and to state otherwise brings the argument
back to the CCA’s negative trackers focus.”41
Commission findings
53.
The CCA commented on the incentive to group projects and programs advantageously in
order to qualify for a higher K factor. In its argument, the CCA presented a grouping principle
that was focused on minimizing the amounts paid by customers.42 The CCA claimed that Fortis
had utilized groupings with the goal of eliminating projects with negative accounting test results
from the selected groupings in order to maximize the K factor calculation; resulting in windfall
gains for the company.
54.
Grouping projects for the sole purpose of either minimizing or maximizing the capital
tracker revenue is contrary to the PBR decision. The Commission recognizes that a company has
an incentive to group together those projects that produce a positive accounting test, but are
individually below the first tier of the materiality threshold as an applied-for tracker in order to
exceed the materiality threshold on a collective basis. A company also has an incentive to group
a project that is below the first tier of the materiality threshold with another group that exceeds
the threshold. In addition, a company has an incentive to isolate projects for which the
accounting test is negative to avoid providing any offset to the K factor calculation in the
38
39
40
41
42
Exhibit 98.01, AUC ruling on motion by FortisAlberta Inc. to strike portions of the evidence of the Consumers’
Coalition of Alberta and the Office of the Utilities Consumer Advocate, October 2, 2014, paragraph 10.
Exhibit 3220-X0005, Fortis reply argument, paragraph 83.
Exhibit 3220-X0005, Fortis reply argument, paragraph 81.
Exhibit 3220-X0005, Fortis reply argument, paragraph 82.
Exhibit 3220-X0004, CCA argument, paragraph 124.
Decision 3220-D01-2015 (March 5, 2015) • 13
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
accounting test. In Decision 2013-435, the Commission commented on these incentives at
paragraphs 403 and 404:
403.
At the same time, the Commission shares the UCA’s view that, given the
importance of project grouping, “the method of aggregating projects into a program-level
will require close scrutiny.” This is because grouping of projects will have a direct impact
on the results of the accounting test and the project assessment under Criterion 1, as well
as the assessment of materiality under Criterion 3.
404.
Specifically, with respect to the accounting test under Criterion 1, it would be
possible for a company to group projects together for the sole purpose of ensuring that
the revenue from the I-X mechanism is insufficient to fund a portion of the revenue
requirement associated with capital expenditures for the proposed projects, as grouped.
The UCA reached a similar conclusion when it stated that “it would be possible for
Utilities to group projects together in such a way as to artificially inflate the numbers in a
single program to fall outside historic levels of spending.” Likewise, with respect to
Criterion 3 dealing with materiality, the UCA noted that the companies may attempt “to
roll projects together to meet the materiality criterion.” The Commission agrees and finds
that this is a relevant consideration for the four basis point threshold under the first tier of
the materiality test set out in Section 3.3. [footnotes omitted]
55.
Given these incentives, the Commission requires that a company’s proposed grouping of
capital tracker projects must conform with the requirement of the accounting test “to compare the
forecast or actual revenue requirement for [a] project to the going-in revenue historically
associated with a similar type of capital expenditures ...”43 in order to determine the extent to
which a project or program is underfunded by the I-X mechanism. The requirement to compare
forecast or actual revenue requirement to the going-in revenue historically associated with
similar types of expenditures suggests that project or program grouping for capital tracker
purposes should be aligned in most cases with the historical groupings utilized by the company
in previous rate cases in order to facilitate the required comparison. Where historical groupings
are employed in determining groupings for capital tracker purposes, there is little reason to
question whether the company has manipulated the grouping of projects. Where a company’s
proposed grouping of projects is at odds with its past accounting and reporting practices, as the
Commission cautioned in Decision 2013-435, the Commission must assess the reasonableness of
the proposed grouping on a case-by-case basis. In doing so, the Commission shall take into
account “the unique differences among the companies with respect to their historical project
classifications in cost-of-service applications, limitations of the companies’ accounting systems,
and the nature and geographic location of the companies’ facilities.”44 Grouping on an
historically consistent basis may not be sufficient, however, for capital tracker grouping
purposes. Historical groupings have been done for a number of accounting, organizational and
business reasons, and may not be suitable for determining whether particular projects or
programs are sufficiently similar to be grouped together for capital tracker purposes.
Accordingly, the Commission may determine that such historical groupings should be altered or
refined.
56.
The Commission accepts Fortis’ position that all of the groupings presented in its
application were employed in its previous DTA. The Commission notes that in describing the
method utilized by Fortis in grouping its projects, the CCA stated “Fortis has gone to the lowest
43
44
Decision 2013-435, paragraph 262.
Decision 2013-435, paragraph 405.
14 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
level groupings that existed in the prior GTA.”45 The fact that Fortis utilizes all of the groupings
in existence prior to the onset of PBR supports a finding that Fortis has not engineered groupings
in order to qualify more projects for capital tracker treatment.
57.
In determining the correct tier of grouping to be used by Fortis, it is important to consider
the logic behind the accounting test, which the Commission stated in Decision 2013-435 was “to
compare the forecast or actual revenue requirement for [a] project to the going-in revenue
historically associated with a similar type of capital expenditures. …”46 Any grouping that
attempts to match current capital expenditures with going-in revenues that, historically, are not
similar in nature would undermine the purpose of the accounting test. Having groupings that are
highly aggregated could have this effect by making revenue requirement comparisons for similar
types of expenditures difficult or meaningless.
58.
In Decision 2013-435, the Commission gave instructions to Fortis to disaggregate its
externally driven grouping.47 This was done because the externally driven grouping was too
broad, and included projects and programs that were dissimilar to one another in the same group.
The Commission finds that Fortis has applied the instructions related to externally driven
projects and programs in its current application, and has generally used the guidance to
disaggregate projects and programs that were dissimilar for all capital tracker grouping
categories.
59.
The Commission finds that the CCA’s recommendations to aggregate projects and
programs into higher level groupings for the single purpose of offsetting positive accounting test
results for some projects or programs with negative accounting test results for other projects and
programs and, thereby, minimizing the overall K factor amount, would likely result in making
revenue requirement comparisons of similar types of expenditures significantly less precise,
which would not be in-keeping with the findings made in Decision 2013-435.
60.
While determining the correct tier for assessing capital projects and programs is
important in ensuring the viability of the accounting test, the Commission also notes that there
may be other circumstances where a question arises with respect to when to aggregate capital
projects and programs demonstrating positive and negative accounting tests results. For example,
a negative accounting test result will occur when a large one-time capital addition has been made
before the onset of the PBR term, and similar additions do not recur during the PBR term. An
example of this is the AMI program highlighted by the CCA in its argument. These types of
negative accounting test results do not automatically represent a windfall gain for the company;
they are but one component of a multifaceted PBR plan. Overall, the I-X mechanism is meant to
provide a reasonable opportunity for the company to recover its prudently incurred costs and
earn a fair return, and there will be many pluses and minuses that work to achieve this result.
Accordingly, the Commission considers that the negative accounting test result for Fortis’ AMI
program is not an unexpected or problematic outcome resulting from the implementation of
PBR. Further, the Commission observes that some of the benefits of the program, in the form of
reduced operational costs, were incorporated into Fortis’ going-in rates and, therefore, are
already being shared with customers. Given the above, it would be contrary to the underlying
rationale of PBR and capital trackers to offset negative accounting test results associated with a
properly grouped set of capital projects or programs against positive accounting test resulting
45
46
47
Exhibit 3220-X0008, paragraph 8.
Decision 2013-435, paragraph 262.
Decision 2013-435, paragraph 1001.
Decision 3220-D01-2015 (March 5, 2015) • 15
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
from other properly grouped sets of capital projects or programs, with a sole purpose to reduce
the overall K factor amount. Nonetheless, the Commission makes some findings in Section 5.2
regarding the grouping of metering-related projects and programs, and the AMI program is
included in these findings.
61.
Given the above, it would be contrary to the underlying rationale of PBR and capital
trackers to offset negative accounting test results associated with a properly grouped set of
capital projects or programs against positive accounting test resulting from other properly
grouped sets of capital projects or programs, with a sole purpose to reduce the overall K factor
amount.
62.
The Commission also notes that in Proceeding 3558, the Commission will be considering
possible changes to the minimum filing requirements for capital trackers. In that proceeding, the
Commission will examine, among other matters, whether the companies should be required to
list all projects, including projects with negative accounting test results, in the accounting test
model to facilitate the Commission’s examination of the reasonableness of the company’s
proposed grouping.
5.2
Fortis’ proposed grouping of projects
63.
In developing the grouping for its projects and programs, Fortis explained that it utilized
guidance provided by Decision 2013-435. Fortis noted that the groupings for customer growth
and the DCC/SCADA project were approved in Decision 2013-435.48 Fortis also considered that
Decision 2013-435 instructed it to separate its broader “externally driven” grouping into AESO
contributions, substation associated upgrades, IPP interconnections, and distribution lines moves,
in order to be consistent with historical project classifications in cost-of-service applications.49
64.
Fortis considered that the remaining groups are consistent with the line-by-line groupings
used in past DTAs. Fortis supported the continued use for these groupings for capital tracker
purposes, stating:
This level of groupings has been accepted as appropriate for DTA purposes for the same
reasons they should be deemed appropriate as capital trackers. The expenditures are of a
similar nature, have been consistently recorded in FortisAlberta’s financial systems, and
those in each grouping are necessary because of a common driver.50
65.
To provide additional support for its groupings, Fortis also made references to the
similarity between its selected groupings and the groupings approved for other companies for
capital tracker purposes as justification for the groupings it selected. Fortis specifically made
reference to the level of granularity approved for EPCOR Distribution & Transmission Inc. 51
Fortis also made reference to the guidance provided by the Commission in Decision 2013-435,
with respect to the groupings used by ATCO Gas and Pipelines Ltd., as justification to rely on
historical groupings used in rate applications prior to the onset of PBR.52
48
49
50
51
52
Exhibit 63, Fortis application, paragraph 38.
Exhibit 63, Fortis application, paragraph 39.
Exhibit 63, Fortis application, paragraph 42.
Exhibit 3220-X0001, Fortis argument, paragraph 64.
Exhibit 63, Fortis application, paragraph 41; Transcript, Volume 4, pages 679-681 (Mr. Eck); and Exhibit 3220X0001, Fortis argument, paragraph 44.
16 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
66.
In addition to the arguments made by the CCA regarding the incentives associated with
selecting the grouping of projects and programs for capital tracker purposes and the impact of
negative accounting test results, discussed in Section 5.1, the CCA identified some specific
concerns with respect to the groupings used by Fortis.
67.
The CCA considered that Fortis changed its groupings from the previous treatment
utilized in its DTAs. As discussed in Section 5.1, one of the changes that the CCA claimed Fortis
made was how it used a four tier categorization method to group projects and programs, resulting
in fewer capital trackers because more projects and programs would be aggregated into larger
groupings. Another specific concern identified by the CCA was the treatment of DCC/SCADA
project. The CCA claimed that “there was no such a thing as [a] DCC/SCADA project embedded
in the going in rates” and that prior to PBR, the project would have been split between three
categories: efficient operations, information technology (IT) and buildings and structures.53 With
respect to the DCC/SCADA project the CCA stated:
For example, Facilities and DCC/SCADA is an example of how asset or project
groupings can be managed to generate extra capital tracker revenue. The DCC is a
building. Facilities are comprised of buildings. SCADA is specialized electronic and
communications equipment. IT contains specialized electronic and communications
equipment. Both project[s] could easily be grouped under facilities and IT respectively.54
68.
In argument, the CCA summarized its specific recommendations related to Fortis’
grouping, including its proposal to address the incentive issues discussed in Section 5.1 and other
grouping concerns. The CCA recommended that Fortis:



remove the DCC/SCADA project and put the forecast costs into the same categories
that they were in in the 2012 GTA
change its groupings to be prior groupings, those being customer growth, AESO
contributions, externally driven metering and other and sustainment capital
honor the NSA made with customers and continue to pass the value realized by the
negative accounting test results through to customers55
69.
Fortis disagreed with the CCA’s proposal to group the components of the DCC/SCADA
project with other categories. Fortis stated:
The DCC/SCADA Project has already been specifically considered in the capital tracker
grouping context, and approved as a group in Decision 2013-435. Again, the CCA must
and does ignore that fact in making the argument it does.56
70.
Fortis reinforced its position for why the DCC/SCADA project is unique, and why all of
the components of the project belong together. At the hearing, Mr. Eck stated:
This project, all the different components are interrelated. The DCC, for example, is
centralizing our operations. SCADA field devices need to be controlled remotely from
that device, so the SCADA equipment wouldn't be able to function without the DCC and
vice versa. The DCC project we have to host or we have to accommodate operators, so
53
54
55
56
Exhibit 3220-X0004, CCA argument, paragraph 128.
Exhibit 81.01, CCA evidence, A21.
Exhibit 3220-X0004, CCA argument, paragraph 133.
Exhibit 3220-X0005, Fortis reply argument, paragraph 69.
Decision 3220-D01-2015 (March 5, 2015) • 17
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
we need a building, and the distribution technology is basically the base station, what we
refer to as the SCADA base station, as well as the OMS system. So all these activities are
interrelated. So from our perspective, all these components should be grouped as one
project.57
71.
The Commission questioned Fortis about how capital projects and programs had been
grouped. When asked by Commission counsel if it would “make any sense and provide better
cost management and regulatory efficiencies and reduce the number of separate capital tracker
projects to have a single capital tracker for certain asset types like poles supported by a single
business case describing the different requirements associated with the asset.”58 Fortis replied
that it does not run the business, from an operational perspective, based on asset types or
components, but rather on the drivers for the programs. Mr. Eck explained:
So if you look at all the different programs, you could have overlap between asset types.
So we have to rely on the driver for that particular program, the purpose for that
program.59
72.
Mr. Lorimer added that it would be difficult to manage projects based on asset types.
Mr. Lorimer stated:
The organization is run so that certain programs can be judged against what we feel costs
should be for those particular programs and make sure that the delivery of those programs
is appropriate considering the scope of those programs. If we started to look at poles on
its own, for instance, there would be -- it would be very difficult to put accountability
within our company on how poles is being run because of the fact that it's being drawn on
in so many different ways throughout the company. So it may work as far as maybe an
accounting test exercise, but I think it would not work as well as far as putting
accountability for programs and making sure that cost accountability is there within
programs from how the business is run.60
73.
Another specific area of grouping questioned by the Commission was the Distribution
Capacity Increases program. Commission counsel asked why this program is separate from the
customer growth program, to which Fortis responded that the Customer Growth program
involves connecting a new customer where there were no facilities in place, while the
Distribution Capacity Increases program involves upgrading the existing distribution system or
connecting two different existing lines or circuits.61
74.
Within the Distribution Capacity Increases program, Fortis included two separate
business cases to support this grouping, Capacity Increase projects and System Improvement
projects. Within the System Improvement projects business case, there were three distinct
subcomponents: System Improvement projects, the System Neutral program and the Line Loss
Reduction program. In response to questions from Commission counsel, Mr. Bahry explained
that it is possible to delineate issues with the distribution system that are being addressed by each
of the subprograms.62 Fortis explained, however, that in past DTAs, all of these subprograms
57
58
59
60
61
62
Transcript, Volume 3, pages 485-486 (Mr. Eck).
Transcript, Volume 2, page 337 (Mr. Boyd).
Transcript, Volume 2, page 338 (Mr. Eck).
Transcript, Volume 2, page 339 (Mr. Lorimer).
Transcript, Volume 3, page 551 (Mr. Eck).
Transcript, Volume 4, page 598 (Mr. Bahry).
18 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
were included in the larger category of the Distribution Capacity Increases program, and justified
this on the basis that the assets being replaced are of like nature, and have a common driver,
because “system planning is required for the orderly and economic development of the
distribution system to address equipment overloads and power quality issues that arise from
system load growth.”63
75.
When requested by the Commission in an information request to recalculate the
accounting test for the distribution capacity increases program, assuming each of the
subprograms within the group were to be treated as separate groupings, Fortis’ response
indicated that only the system improvements component would require additional funding
through capital tracker treatment, and the amount of additional funding would be essentially the
same as the amount of funding for the aggregated group. Fortis’ analysis was as follows:
Table 3.
Accounting test analysis for a disaggregated distribution capacity increases program64
2013
RR
actual
Capacity
Increases
projects
System
Improvements
System
Neutrals
Line Loss
Reduction
2013
Revenue
from PBR
formula
K factor
revenue
2014
RR
2014
Revenue
from PBR
K factor
formula
revenue
($ million)
2015
RR
2015
Revenue
from PBR
formula
-
10.6
10.7
K factor
revenue
9.6
9.9
-
10.2
10.3
-
2.9
2.8
-
3.5
2.9
0.6
4.2
3.0
1.2
0.8
0.9
-
0.9
0.9
-
1.1
0.9
-
0.3
0.2
-
0.3
0.2
-
0.3
0.2
-
76.
The Commission also requested additional information explaining the grouping of the
conversion from three-wire to four-wire services projects with metering of unmetered oilfield
services projects into a single capital tracker program. Mr. Eck explained at the oral hearing that
metering of unmetered oilfield services originally had its own grouping because the driver was
metering the unmetered sites. However, “once [Fortis] commenced the program, [it] recognized
that [it] had to reconstruct lines to align with this.”65 Fortis explained that in 2011, it grouped
these two activities together to realize project efficiencies and eliminate potential safety hazards.
Fortis explained that “as unmetered oilfield services are metered, all three-wire services are
upgraded to four-wire to eliminate potential safety hazards,” and that as the oilfield services are
metered “it is often found that customers have already upgraded their equipment to a four-wire
system,” thereby necessitating upgrading to four-wire service to maintain compliance with CSA
standards.66 Mr. Eck also explained that prior to 2010, Fortis had a separate program for the
conversion of three-wire to four-wire services, but Fortis amalgamated the two programs when it
“realized that many of the three wire to four conversions were associated with unmetered sites.”67
63
64
65
66
67
Exhibit 78.02, AUC-FAI-23(a).
Exhibit 78.02, AUC-FAI-23(d).
Transcript, Volume 3, page 532 (Mr. Eck).
Exhibit 78.02, AUC-FAI-37(a).
Transcript, Volume 3, page 533 (Mr. Eck).
Decision 3220-D01-2015 (March 5, 2015) • 19
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
77.
In its accounting test, Fortis included several different groupings that are related to
metering. These include the Automated Meter project, the Metering Unmetered Oilfield project
and a separate category called “metering & other,” which itself is composed of metering,
conventional meters, automated meters in store, and system purchases.68 Fortis was questioned
on why it would not be necessary to group metering projects including the metering unmetered
oilfield services with other metering projects. Mr. Eck explained “the metering unmetered oil
field services project involves reconstruction of distribution lines, and that’s the reason that I said
that that project was different from a normal metering project, that the work involved is different
from installing a meter for a customer.”69 Mr. Eck went on to explain that the metering of
unmetered oilfield services is “not just the construction of distribution lines between our source
transformer and customer itself, it’s always actually installing a meter base or a service entrance
for that load or for that customer.”70
78.
The Commission also asked about the Compliance, Safety, Aging Facilities and
Reliability (CSAR) program, and if there were overlaps in the type of work being done under
this program with the urgent repairs program and the worst performing feeders program. Mr. Eck
explained that the CSAR program is based on a seven-year cycle, the worst performing feeders is
based on outages over a 12-month span, and urgent repairs are done to address immediately
outages that occur.71 Mr. Eck also explained that there may be some interrelationship between the
programs, with proactive work being done on the CSAR program resulting in “a reduction in
worst performing feeders as well as urgent repairs for certain types of incidents.”72
79.
The UCA did not provide evidence challenging the grouping of projects and programs.
Making specific reference to 2014 capital trackers, the evidence of Mr. Shymanski stated “I do
not take issue with the categories of Capital Tracker proposed by FAI for 2014.”73
Commission findings
80.
In Decision 2013-435, the Commission discussed the importance of project grouping
because it has a direct effect on the results of the accounting test and the project assessment
under Criterion 1, as well as the assessment of materiality under Criterion 3. The Commission
indicated that projects could be grouped where there are “a number of smaller related items
required as part of a larger project”74 or program.
81.
In Decision 2013-435, the Commission provided further guidance on how capital projects
and programs should be grouped. The Commission indicated that grouping must allow for a
“meaningful application of the accounting test and materiality test”75 and that grouping would be
assessed on a case-by-case basis for individual companies. The Commission further indicated
that projects must be “sufficiently similar in nature to warrant grouping into a single program.”76
Expressed another way, the projects or programs proposed for grouping should be “similar in
68
69
70
71
72
73
74
75
76
Taken from Exhibit 61, Appendix B 2013-2015 capital trackers.
Transcript, Volume 3, page 548 (Mr. Eck).
Transcript, Volume 3, page 549 (Mr. Eck).
Transcript, Volume 3, pages 527-528 (Mr. Eck).
Transcript, Volume 3, page 529 (Mr. Eck).
Exhibit 82.02, UCA evidence of Mr. Shymanski, A15.
Decision 2013-435 paragraph 47.
Decision 2013-435, paragraph1001.
Decision 2013-435, paragraph 839.
20 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
nature or function and have a common requirement for capital investment.”77 The Commission
noted that geographic location alone is not a sufficient justification to consider projects as being
dissimilar.78 The Commission also indicated that projects and programs should ordinarily be
grouped, where applicable, in a manner “consistent with historical project classifications in costof-service applications.”79 The Commission noted other factors that may be considered when
assessing grouping including whether the component projects grouped together have a “common
driver”80 or whether a project is sufficiently “unique and substantial”81 so as to merit grouping on
a stand-alone basis. Even where a grouping of similar projects or programs into a capital tracker
of a certain nature may be otherwise acceptable, the grouping may not be allowed if the
supporting information is not sufficiently disaggregated to allow for a “reasonable assessment of
the forecast or actual capital expenditures”82 for each of the included project or program
categories.
82.
In its 2013-2015 capital tracker application, Fortis generally grouped capital projects and
programs for capital tracker purposes in accordance with how it has grouped projects and
programs historically, which corresponds to how Fortis manages its operations.83 Fortis followed
specific guidance provided by the Commission in Decision 2013-435 with respect to utilizing the
customer growth program and DCC/SCADA project groupings, and to disaggregate the broader
externally driven capital tracker category.84 In addition, since this approach reflects the manner in
which Fortis manages its costs on a project-by-project basis, its grouping of projects and
programs allows for administrative efficiency. This approach has resulted in 27 relatively
granular capital project categories. These groupings are not always based on asset type and, as
such, many capital tracker projects involve the same asset types with similar drivers in different
groupings. At the same time, there are some instances where a grouping has many different types
of assets, and there may be different drivers within the same grouping. The Commission must
determine if this approach is too granular for purposes of a capital tracker proceeding where the
objective is to ascertain logical groupings of capital that qualify for capital tracker treatment. In
order to answer this question, the Commission will review each of the issues on grouping
discussed above.
83.
With respect to the concerns raised by the CCA regarding the grouping of the
DCC/SCADA project, the Commission accepts Fortis’ argument that the Commission already
ruled on the grouping of this project in Decision 2013-435. In that decision, the Commission
found: “With respect to the DCC/SCADA project, the Commission finds that this is a unique and
substantial project and, accordingly, the Commission will accept the grouping of this project for
the purpose of this decision.”85 The Commission has not been convinced, based on the material
on the record of this proceeding, that it is necessary to alter the finding with respect to the
grouping of the DCC/SCADA project made in Decision 2013-435. The Commission accepts
Fortis’ arguments that the components of the DCC/SCADA are interrelated with one another
and, therefore, should be grouped together. They work to provide unique functionality that
77
78
79
80
81
82
83
84
85
Decision 2013-435, paragraph 711.
Decision 2013-435, paragraph 837.
Decision 2013-435, paragraph 1001.
Decision 2013-435, paragraph 616.
Decision 2013-435, paragraph 1003.
Decision 2013-435, paragraph 1002.
Transcript, Volume 2, page 339 (Mr. Lorimer).
Decision 2013-435, paragraphs 1000-1004.
Decision 2013-435, paragraph 1003.
Decision 3220-D01-2015 (March 5, 2015) • 21
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
previously did not exist for Fortis and, therefore, can be isolated from being grouped with other
projects or programs.
84.
With respect to the CCA’s recommendation to “change its groupings to be prior
groupings, those being customer growth, AESO contributions, externally driven metering and
other and sustainment capital”86 the Commission determined in Section 5.1 that Fortis has
applied the Commission guidance related to externally driven projects and programs in its
current application. In Section 5.1, the Commission also found that the CCA’s recommendations
to aggregate projects and programs into higher level groupings for the purpose of offsetting
positive accounting test results for some projects or programs with negative accounting test
results for other projects and programs, and thereby minimizing the overall K factor amount, to
be contrary to the findings in Decision 2013-435.
85.
With respect to the CCA’s recommendation to “honor the NSA agreement made with
customers and continue to pass the value realized by the negative accounting test results through
to customers”87 the Commission notes in Section 5.1 that the benefits of the AMI program, in the
form of reduced operational costs, were partially incorporated into Fortis’going-in rates and,
therefore, are already being shared with customers, and that it is not necessary for the negative
accounting test results associated with this program to be included, in their entirety, as an offset
to the overall positive K factor for the company.
86.
The grouping of the Distribution Capacity Increases program, which is made up of four
subprograms, Capacity Increases projects, System Improvements, System Neutrals and Line
Loss Reduction, is accepted for the purpose of this decision because this grouping is consistent
with past practices of Fortis. The Commission understands that Fortis has grouped the
distribution capacity increases program in the manner that it has because “all these programs are
triggered from [its] distribution planning functions where they actually have an overview of the
entire system, and they plan the system.”88 The Commission considers that regardless of the
function within the company that originates the subprograms, the subprograms may not be
sufficiently similar to one another to justify maintaining this grouping for capital tracker
purposes. For example, projects to address line losses appear to have different driver (i.e., to
reduce line losses) than projects that are required for capacity increases (i.e., to accommodate
customer growth). Accordingly, Fortis is directed to reassess, in its next capital tracker
application, the grouping of the distribution capacity increases program, and the possibility of
disaggregating this program. Fortis should fully explain the reasons for its decision to maintain
the present grouping or to disaggregate the program.
87.
In its accounting test, Fortis included several different groupings that are related to
metering. These include the automated meter project, metering unmetered oilfield project and a
separate category called “metering & other,” which itself is composed of metering, conventional
meters, automated meters in stores, and system purchases.89 The Commission accepts that Fortis
has historically separated its metering capital additions into these categories, and is, therefore,
willing to accept these groupings for the purpose of this decision. However, other than a limited
discussion at the oral hearing, there was little evidence on the record of the proceeding
explaining why it is necessary to continue to separate the groupings for capital tracker purposes.
86
87
88
89
Exhibit 3220-X0004, CCA argument, paragraph 133.
Exhibit 3220-X0004, CCA argument, paragraph 133.
Transcript, Volume 4, page 596 (Mr. Eck).
Taken from Exhibit 61, Appendix B 2013-2015 capital trackers.
22 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Mr. Eck explained that the metering unmetered oilfield project is different because of additional
system upgrades that must be made in conjunction with the addition of the meters.90 However,
the Commission considers that this distinction may not be sufficient, on its own, to justify the
separation of the project into its own group in future years. The Commission considers that there
are many instances of capital trackers that include different types of interrelated assets which are
included within the same grouping because the various capital additions all have similar drivers.
Accordingly, Fortis is directed to explain, in its next capital tracker application, why it is not
reasonable to group all metering-related projects and programs into a single grouping, and
whether such grouping is warranted.
88.
Within the Metering Unmetered Oilfield project, Fortis included the conversion from
three-wire to four-wire services. Fortis included this component in the grouping because the
work is generally done at the same time as the work on the Metering Unmetered Oilfield project.
However, Fortis indicated that the conversion from three-wire to four-wire services is done to
address safety concerns and to maintain compliance with CSA standards. The Commission
considers that this is a different driver from other metering projects, which are generally driven
by the need to improve or maintain the effectiveness of collecting metering data by the company.
For the purpose of this decision, the Commission accepts grouping the conversion of three-wire
to four-wire services with the Metering Unmetered Oilfield project because recently Fortis has
been managing these projects together. However, Fortis is directed to reassess, in its next capital
tracker application, the grouping of the conversion of three-wire to four-wire services, and fully
explain the reasons why Fortis has or has not disaggregated the program. If the conversion of
three-wire to four-wire services program is disaggregated, for the purposes of the capital tracker
accounting test, the Commission considers that it would be necessary for Fortis to align the
capital additions under the three-wire to four-wire conversion program made during the PBR
term with the capital additions under the three-wire to four-wire conversion program that existed
prior to, and after, this activity was merged with the metering unmetered oilfield services.
89.
With respect to the separated groupings of the CSAR program, the Worst Performing
Feeders program and the Urgent Repairs program, the Commission is willing to accept the
separation of these programs into separate groupings for the purpose of this decision because
Fortis has historically managed the three programs separately. The Commission observes,
however, that a relationship exists between these programs. Work being done on the CSAR
program, which is done on a seven-year cycle, may reduce the amount of work done on an
annual basis under the worst performing feeders and urgent repairs programs.91 Further, the
assets involved with these three programs are likely to be similar, and the driver for the three
programs would generally be to address issues resulting in outages on the system. Accordingly,
Fortis is directed to explain, in its next capital tracker application, whether it is possible to group
the three programs together and whether such a grouping is warranted.
90.
In light of the above considerations, the Commission finds that the grouping of Fortis’
projects or programs proposed for capital tracker treatment appears to be reasonable for the
purposes of the present application, subject to the directions above for Fortis to review certain
groupings in its next capital tracker application. Fortis’ project groupings are consistent with the
Commission’s determinations in Decision 2013-435, generally reflect projects and programs that
are of a sufficiently similar nature, in terms of the types of assets that are involved and the
90
91
Transcript, Volume 3, page 548 (Mr. Eck).
Transcript, Volume 3, page 529 (Mr. Eck).
Decision 3220-D01-2015 (March 5, 2015) • 23
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
drivers for the capital additions, to warrant grouping into a single program, and reflect the
company’s practice in previous DTAs.
91.
For the purpose of this decision, the Commission accepts Fortis’grouping of projects, as
proposed in the 2013-2015 capital tracker application. Accordingly, the Commission’s
accounting test and the first tier of its materiality test will be applied to Fortis’ projects and
programs proposed for capital tracker treatment as filed. With respect to the project assessment
component of Criterion 1, the Commission will assess the component projects of Fortis’
programs because, even though individual projects within a program address similar issues, each
project is sufficiently independent so as to require individual justification.
6
Deferral of capital expenditures planned in 2013
92.
In 2013, Fortis made a decision to delay expenditures on certain capital projects,
including those for which it subsequently sought capital tracker treatment in the present
application, due to what it referred to as the “uncertainty as to the nature and extent of capital
tracker treatment.” Fortis elaborated on this issue in its 2013-2015 capital tracker application as
follows:
In 2012, the Company determined that the effect of Decision 2012-237 was a shortfall in
funding for capital expenditures over the PBR term. Since greater certainty with respect
to capital expenditures would not be forthcoming until the Commission ruled on the
Capital Tracker Application in late 2013, the Company made adjustments to capital
expenditures in 2013.
Actual 2013 capital expenditures remained high in order to meet customer needs and the
Company’s obligations. In undertaking the 2013 capital program with the uncertainty as
to the nature and extent of capital tracker treatment, the Company assessed expenditures
that could be prudently and practically deferred in the short term. Much of the
Company’s capital expenditures are non-discretionary, in that deferral would mean nonfulfillment of statutory obligations and, in some cases, penalties due to non-fulfillment of
contractual obligations with suppliers and contractors. The Company deferred certain of
its 2013 capital expenditures to 2014 and 2015 as a short-term measure, as discussed in
the relevant appendices.92
93.
Table 4 below summarizes the amounts that Fortis deferred from 2013 to 2014 and 2015
with respect to five proposed capital trackers. The table shows the actual capital expenditures in
2013 for these projects, as well as Fortis’ estimate of forecast efficiency gains in 2014 for the
five projects or programs that will have the effect of lowering overall costs for projects deferred
from 2013 into 2014 or later. Fortis clarified that the deferred amounts should be taken as
estimated maximum deferrals, since the 2013 actual capital expenditures would have been
affected by other matters such as, for example, productivity gains resulting from incentives under
PBR.93 During the hearing, Fortis also stated that in estimating the 2013 deferral amounts, it
either identified the specific projects within a program that were deferred, or inferred the
amounts based on the expenditure trends over the 2012 to 2014 period.94
92
93
94
Exhibit 63, application, paragraphs 114-115.
Exhibit 78.02, AUC-FAI-2(a).
Transcript, Volume 2, page 309, lines 9-15 (Mr. Lorimer).
24 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
94.
Fortis stated that the 2013 deferrals were a short-term measure that cannot be continued,
and the company does not have plans to defer any capital tracker projects in 2014 and 2015.
However, Fortis did not discard the possibility that “[a]djustments, if any, to capital plans in
respect of 2015 could later be made, taking into account as always such matters as resource
availability for projects and any other changing circumstances.”95
Table 4.
2013 capital expenditures deferred due to capital tracker treatment uncertainty96
Capital tracker project or program
Distribution Capacity Increases program
Metering Unmetered Oilfield Services
project
Worst Performing Feeders program
Pole Management program
Compliance, Safety, Aging Facilities and
Reliability program
Total
2013
specific
deferrals
2013
inferred
deferrals
6.5
8.0
0.5
-
1.5
15.0
0.5
31.5
2013
total
deferrals
($ million)
7.0
2013
actual
capital
expenditure
2014
forecast
efficiency
gains
8.1
(0.4)
(0.5)
8.0
0.2
2.9
1.5
15.0
4.5
15.6
3.4
7.4
3.4
34.9
35.8
(0.9)
(1.8)
95.
In response to a Commission’s information request, AUC-FAI-2(b), Fortis further
elaborated on its decision to defer some of the 2013 capital expenditures:
In the unusual regulatory context of where capital tracker considerations stood at the
time, the Company was faced with possibilities that were inclusive of the potential that
customer growth investments in excess of $135 million might be ineligible for capital
tracker treatment. With a total capital program forecast to continue at high levels, and that
program being predominately comprised of non-discretionary expenditures, specific 2013
capital expenditures were deferred.
Based on careful consideration of each expenditure category, the Company assessed that
certain capital expenditures could be prudently and practically deferred in the short term.
For those of the Company’s capital expenditures that are non-discretionary, such as
customer connections, deferral was not considered. In the limited circumstances where
projects were deferred, as explained in the relevant Appendices to this Application, those
deferrals were targeted to avoid penalties and increased costs to customers.97
96.
Fortis also indicated that given the “carefully targeted nature of the deferrals […], service
quality was not adversely impacted.”98 In response to the Commission’s question on whether the
project deferrals resulted in an increase in costs, Fortis responded that due to the short duration
of the deferrals, it did not expect any meaningful increase in costs over time.99 During the
hearing, Fortis acknowledged that unit costs of the deferred projects (e.g., labour and materials)
will increase by inflation. However, Fortis maintained that these increases in cost will be largely
offset by its productivity improvements, possibly even leading to a decline in unit costs.100 Fortis
95
96
97
98
99
100
Exhibit 78.02, AUC-FAI-2(d).
Exhibit 78.02, AUC-FAI-2(a) and relevant business cases.
Exhibit 78.02, AUC-FAI-2(b).
Exhibit 78.02, AUC-FAI-2(c).
Exhibit 78.02, AUC-FAI-2(g).
Transcript, Volume 2, pages 330-333 (Mr. Eck and Mr. Lorimer), as corrected in Exhibit 126.01.
Decision 3220-D01-2015 (March 5, 2015) • 25
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
also confirmed that there are no proposed capital trackers for 2014 and 2015 that would not have
met the accounting test under Criterion 1 and the materiality test under Criterion 3, had the
deferrals not occurred.101
97.
In his written evidence, Mr. Shymanski, acting on behalf of the UCA, pointed to Fortis’
statement in response to AUC-FAI-2(c) that delaying the five capital tracker projects or
programs listed in Table 4 from 2013 to 2014 and/or 2015 did not have an adverse effect on
service quality. Therefore, Mr. Shymanski stated that these projects or programs should not be
afforded capital tracker treatment and he proposed that the associated deferred amounts totalling
$34.9 million be removed from the 2014 and 2015 K factor calculation on the basis that these
projects do not meet the Criterion 1 requirement that “in the absence of the proposed capital
expenditures, deterioration in service quality and safety would result,”102 as set out in
Decision 2013-435.103
98.
In addition, Mr. Shymanski referenced Fortis’ response to a Commission information
request, where the company indicated it did not complete some of the projects under the
Substations Associated Upgrades program in 2013, as originally planned, due to various reasons
such as, for example, delays as a result of late municipal approvals and substation site
preparation.104 Mr. Shymanski recommended that Fortis:
… should be directed in its compliance filing to show each project in 2013 it was
proposing to include in the 2013 Capital Tracker true-up that was delayed into 2014 or
future years, and if no extenuating factor is present, remove these projects from inclusion
in the 2013 Capital Tracker True-Up and resulting K Factor calculations. If the costs are
moved to 2014 or later years, FAI should, in its compliance filing, show why these
delayed costs should be included as Capital Tracker costs.105
99.
During the hearing, Mr. Shymanski clarified that, in his view, “extreme weather” or an
“extreme emergency-type of a situation” would be the only two examples of an extenuating
factor referred to in his evidence. When questioned whether he was aware of any regulators or
industry standards discussing such extenuating factors, Mr. Shymanski indicated that, based on
his reading of paragraph 594 of Decision 2012-237, an extenuating circumstance would be
anything other than a decision subject to a reasonable level of management discretion.106
100. As well, Mr. Shymanski observed that in AUC-FAI-9, the table in the preamble shows
six projects as part of the Substation Associated Upgrade program that have been delayed from
2011 or later to 2014.107 Mr. Shymanski noted that Fortis’ explanations for the delays were
generally that the carry-over was a result of “municipal approval and site preparation delays,”
“contractor delays,” and “start date for the upgrade.” Mr. Shymanski stated the following in
respect of these six substation projects:
If these projects were started in 2011, it is unlikely that the project was required in the
immediate term and that there has been no deterioration in the level of service quality or
101
102
103
104
105
106
107
Exhibit 78.02, AUC-FAI-2(h).
Decision 2013-435, paragraph 1092 c.
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 12-13.
Exhibit 78.03, Attachment AUC-FAI-001 01, SAU 2013 variance analysis.
Exhibit 82.02, UCA evidence of Mr. Shymanski, page 11.
Transcript, Volume 4, pages 736-738 (Mr. Shymanski).
Exhibit 78.02, AUC-FAI-9.
26 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
safety. If the projects were required in the immediate term to prevent a deterioration in
the level of service quality or safety, then FAI would have been required to complete the
projects, in order to ensure there was no deterioration of service levels or safety or there
was no violation of regulations, laws, customer contracts or terms and conditions of
service. FAI has not indicated that any of these events occurred and thus Criteria 1 has
not been met and the capital costs associated with these projects should not be included in
the 2014 and 2015 K Factor calculations.108
101. Mr. Shymanski recommended that the capital additions impact of the six substation
projects listed in the preamble to AUC-FAI-9, totaling $7,411,000 of capital expenditures as part
of the Substation Associated Upgrade program, also be removed from the 2014 K factor
calculations.
102. In its argument, the UCA supported the recommendation of its expert, Mr. Shymanski, to
remove the capital expenditures associated with projects or programs deferred from 2013 to 2014
or 2015 from the K factor calculation and to reassess the remaining amounts against the
materiality threshold under Criterion 3 to ensure that they qualify for capital tracker treatment.109
The UCA submitted that the delay of some of the capital projects proposed by Fortis for capital
tracker treatment in 2013, 2014, and 2015 indicates that these projects fail to meet the
requirements of Criterion 1. Specifically, with reference to paragraph 594 of Decision 2012-237,
the UCA submitted that:110
a. These projects are “likely subject to a reasonable level of management discretion,”
such that “allowing special treatment for this type of capital would eliminate the
incentive for the company to examine all alternatives.”111
b. These projects are not “required to prevent deterioration in service quality and
safety,” such that “service quality and safety cannot be maintained by continuing
with O&M and capital spending at levels that are not substantially different from
historical levels.”112
103. With respect to the first requirement outlined above, the UCA submitted Fortis conceded
that some of its proposed capital tracker projects were discretionary. The UCA expressed its
view that, pursuant to the Commission’s determinations in paragraph 594 of Decision 2012-237,
“the existence of a reasonable level of management discretion is an indicator that a specific
project should not be approved for inclusion in the Capital Tracker.” In this regard, the UCA
reiterated the view of Mr. Shymanski that the deferral of some of Fortis’ proposed capital tracker
projects in 2013, absent extenuating circumstances in the nature of extreme weather or other
emergency-type situations, “is a clear indication of a reasonable level of management
discretion.”113
104. With respect to the second requirement outlined above, the UCA indicated that Fortis
provided no evidence of deterioration in service quality and safety, specific to its capital projects
and specific to the year for which capital tracker treatment is requested, to justify this treatment.
In this regard, the UCA submitted it interprets paragraph 1092(c) in Decision 2013-435 as
108
109
110
111
112
113
Exhibit 82.02, UCA evidence of Mr. Shymanski, page 14.
Exhibit 3220-X003, UCA argument, paragraph 44.
Exhibit 3220-X003, UCA argument, paragraph 35.
Decision 2012-237, paragraph 594.
Decision 2012-237, paragraph 594.
Exhibit 3220-X003, UCA argument, paragraph 37.
Decision 3220-D01-2015 (March 5, 2015) • 27
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
requiring evidence “demonstrating that in the absence of the proposed capital expenditures,
deterioration in service quality and safety would result” in the year for which capital tracker
treatment is sought.114
105. In its rebuttal evidence, Fortis did not agree with the proposals of Mr. Shymanski,
supported by the UCA. Fortis stated:
The UCA is proposing a ‘Catch 22’ perspective. If FortisAlberta cannot demonstrate that
service quality or safety immediately deteriorated because of its capital program
management practices in 2013, then the UCA would conclude that the capital
expenditures deferred in that year are not reasonably necessary to support service quality
or safety. On the other hand, if FortisAlberta could demonstrate that the delay in capital
expenditures did give rise to an immediate deterioration in quality of service or safety,
then the UCA would of course be asserting that FortisAlberta had acted in a clearly
imprudent manner by affecting these specific delays as part of its overall capital program
management.115
106. Additionally, Fortis indicated that the UCA’s position would result in a suboptimal
management of capital programs, and should be rejected:
The UCA suggestions, if adopted for 2013, 2014 and 2015 capital tracker matters, would
serve to inhibit continued prudent management of capital programs, and should not be
accepted. In the past, there have been, and will continue to be, delays and advances to
capital projects that are beyond the control of FortisAlberta. There have also been, and
will continue to be, delays and advances to capital projects that are within FortisAlberta’s
control, but are a reasonable thing to do. One example of such a delay is the Metering
Unmetered Oilfield Services Project, where the execution of the program revealed
complexities and costs that were not initially contemplated, and where resources to
undertake the work were required for other deployments.116
107. In Fortis’s submission, the UCA’s perspective ignores many realities faced by utilities.
For instance, Fortis indicated that the timing of capital expenditures of the Substation Associated
Upgrades is, and should be, directly affected by the progress and timing of the related
transmission system facilities additions. Additionally, Fortis stated that there may be events
within its control that can reasonably bear on the timing of its projects, such as the availability of
a work crew.117
108. According to Fortis, the “recognition that capital tracker projects can and should be
treated with the same reasonable implementation judgment as other capital programs, in those
cases where some discretion is possible, is good policy.”118 Fortis further submitted that in any
event, when the timing of projects varies from forecast, the true-up mechanism assures that no
double recovery occurs.
114
115
116
117
118
Exhibit 3220-X0003, UCA argument, paragraph 39.
Exhibit 99.02, Fortis rebuttal evidence, paragraph 114.
Exhibit 99.02, Fortis rebuttal evidence, paragraph 118.
Transcript, Volume 3, page 385, lines 2-6 (Mr. Eck).
Exhibit 3220-X0005, Fortis reply argument, paragraph 21.
28 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Commission findings
109. The Commission notes Fortis’ evidence that the company’s overall level of capital
expenditures and capital additions in 2013 were close to the 2012 levels. All of this investment
was made by Fortis when the specifics of the capital tracker mechanism were not yet established,
since Decision 2013-435 was not released until December 2013. Therefore, the Commission
accepts Fortis’ argument that the 2013 deferrals were done at a time when the adoption of the
accounting test approach and its ramifications for Fortis were unknown. The Commission also
accepts the evidence of Fortis that deferrals were done without consideration of whether a project
was within a proposed capital tracker program or not. Further, delays were not made in order to
affect the recovery of capital under the capital tracker mechanism and the associated K factor
calculations for 2013-2015.
110. During the hearing, Mr. Lorimer for Fortis provided further confirmation on this matter
when questioned by Commission counsel:
Well, at the time of those deferral decisions, the company didn't have visibility or an
understanding of how the capital tracker mechanism would work. So we weren't looking
for capital tracker versus noncapital tracker deferrals. We were just, in the short term,
managing the risk of significant potential underfund of our capital program in the short
term.
So we didn't know which one -- which portions of our capital program ultimately would
get approval or not for capital tracker treatment. All the decisions around deferring
certain projects were done not with an eye to whether or not it was a tracker or not. It was
just based on what we thought could be done in the very short term until we had more
certainty around the regulatory mechanisms.119
111. The Commission further observes that, unlike in the case of AltaGas and EPCOR, none
of Fortis’ programs or projects were approved for capital tracker treatment in 2013 on a forecast
basis. As observed in Section 3, the Commission did approve the need for some of Fortis’
programs as part of project assessment under Criterion 1 in Decision 2013-435. However, in that
decision, the need was not approved for any of the five projects or programs deferred from 2013
to 2014 or 2015, listed in Table 4 above.
112. Fortis submitted that when faced with the “uncertainty as to the nature and extent of
capital tracker treatment”120 in 2013, the company made a decision to defer expenditures on the
five projects or programs listed in Table 4 to ensure it could continue to fund capital
expenditures associated with customer growth and externally-driven projects that, according to
Fortis, are non-discretionary. At the hearing, Fortis explained this position stating:
MR. LORIMER: So we received the PBR, the original PBR decision back in September
of 2012, so just prior to PBR starting in 2013. When you look at the capital profile of our
company, it's predominated by two main areas, one being customer growth or connecting
new customers to the system. That's about 35 percent of our capital, so about between
130 and $150 million per year. And the other area are areas like transmission driven
investments, the AESO contributions, substation associated upgrades, other -- other areas
that there's no opportunity to defer at all. You react as soon as those requirements come
to us. That's about 35 percent of our program as well.
119
120
Transcript, Volume 2, page 321, line 12 to page 322, line 2 (Mr. Lorimer).
Exhibit 63, application, paragraph 115.
Decision 3220-D01-2015 (March 5, 2015) • 29
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
… The original PBR decision that we received in September of 2012 didn't appear on the
surface to allow for additional funding for our customer growth programs for that one big
part of our capital program that we were expecting in that year. As well, it was unclear at
the time as to what extent we might get coverage for those other programs. So we faced
some difficult questions because of that uncertainty around what would be funded under
the capital tracker model, especially as it related to our growth profile at the time.
The decision to defer was -- we were hoping it would be a short-term decision and that
the clarity would come through the capital tracker process eventually. But the fact that it
seemed so clear on the surface that customer growth wouldn't be allowed caused us to be
very -- to pull back because it was a level -- that area of our program is so big that we
saw some big concerns for us as a company over the five-year period if we couldn't be
funded for that program. So based on that, we looked through the other areas of our
capital program and said if we had to, what can you do in the short term until we can see
if there's a method for funding this big part of our capital program that doesn't look like it
will be funded? And those decisions were I'm not going to say too small, but relatively
small relative to the size of our program in general.
It's about 30 to $35 million out of our entire program. So about 8 percent of our capital
we said: Go out, see what you can find. Don't do anything that will affect safety or, in our
view, reliability in the short term, but find areas that we can defer for a short period of
time. And that's when the deferral was put in place, right in the tail end of 2013 in
response to that uncertainty.
All those deferrals were made without consideration for capital trackers at all. They
weren't done program by program, saying: Let's defer this. We think that's going to
become a tracker eventually. Let's time the implementation of this deferral to come back
on in 2014, or anything like that.121
113. In Decision 2014-373122 dealing with AltaGas’ 2013 true-up and 2014-2015 forecast
capital tracker applications, the Commission stated the following with respect to the deferral of
projects previously approved on a forecast basis for capital tracker treatment:
96.
The Commission does not consider that a project proposed for capital tracker
treatment in the current year should be denied simply because it was approved in a prior
year and deferred. It may be the case that the project was determined to be no longer
necessary in a prior period, or there may have been a valid business reason to defer the
project, even though it was required. In general, a previously approved project that has
been deferred may qualify for capital tracker treatment if there is sufficient evidence that
the deferral was a prudent decision at the time and given evidence of the continuing
necessity to complete the proposed project to maintain service quality and safety.123
114. The Commission recognizes that unlike in the case of AltaGas, no projects were
approved for capital tracker treatment for Fortis in 2013 on a forecast basis. Nevertheless, the
general framework set out in Decision 2014-373 is applicable when considering the deferral of
the 2013 capital expenditures by Fortis.
121
122
123
Transcript, Volume 4, pages 698-701 (Mr. Lorimer), as corrected in Exhibit 126.01.
Decision 2014-373: AltaGas Utilities Inc. 2014-2015 Capital Tracker Application and 2013 Capital Tracker
True-up Application, Proceedings 3152 and 3244, Applications 1610446 and 1610600, December 24, 2014.
Decision 2014-373, paragraph 96.
30 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
115. The Commission considers that the “uncertainty as to the nature and extent of capital
tracker treatment” does not constitute a valid business reason for deferring work planned for
2013 that was required for reasons of service reliability or safety. Indeed, at paragraph 615 of
Decision 2012-237, which was issued prior to Decision 2013-435, the Commission indicated that
a company may choose to undertake a capital investment prior to applying for capital tracker
treatment in a subsequent annual capital tracker filing. In other words, a company does not have
to wait for the Commission’s approval of its forecast for capital tracker treatment to proceed with
projects required to maintain service reliability and safety at adequate levels.
116.
The Commission further observed in Decision 2014-373 at paragraph 176:
176.
AltaGas has an obligation to provide safe and reliable service. The PBR regime
does not alter this fundamental obligation of the company, and the deferral of the
Athabasca project due, in part, to a funding constraint is of concern. The Commission
expects that AltaGas will efficiently manage its system and acquire the funding necessary
to satisfy its obligation to provide safe and reliable service. As noted by the Alberta
Energy and Utilities Board in Decision 2005-019:[124]
The Board is concerned with the position taken by AltaLink. AltaLink
appears to acknowledge that it has a responsibility to provide safe and
reliable service, however, it also chose to defer activities that it
considered necessary once the allowed revenue requirement could no
longer fund them. AltaLink itself has used the words “These were not
easy decisions to essentially place the transmission system at increased
risk because of lack of required resources”. The Board does not consider
this approach to be correct or acceptable.
…
In Decision 2003-061,[125] the Board agreed with AltaLink that certain
activities were necessary however, it did not agree with the revenue
requirement requested by AltaLink to perform these activities. It
determined, based on the evidence before it, that a different revenue
requirement was appropriate. AltaLink, in turn, was obligated to conduct
its affairs in a manner to ensure that it did not compromise service and
reliability, seeking efficiencies as means to achieve any perceived extra
resources, and to better present its case in future test periods. This was
not an invitation to AltaLink to deliberately reduce the level of service it
provided, particularly if the deferred activities involved actions which
could affect reliability and safety. [footnotes omitted]
117. The Commission cannot countenance the delay of capital tracker projects that were
deemed necessary to maintain service reliability and safety within a given period where the delay
arises because of uncertainty over approval of a capital tracker application. Nevertheless, the
Commission recognizes that for the companies under PBR, including Fortis, 2013 was a
transition year as the companies moved from cost-of-service regulation to PBR. As set out earlier
in this section, the Commission is of the view that the 2013 deferrals do not appear to have been
made in order to affect the recovery of capital under the capital tracker mechanism and the
124
125
Decision 2005-019: AltaLink Management Ltd. and TransAlta Utilities Corporation, 2004-2007 General Tariff
Application, Application 1336421, March 12, 2005.
Decision 2003-061: AltaLink Management Ltd. and TransAlta Utilities Corporation, Transmission Tariff for
May 1, 2002 – April 30, 2004, TransAlta Utilities Corporation, Transmission Tariff for January 1, 2002 –
April 30, 2002, Applications 1279345, 1279347 and 1287507, August 3, 2003.
Decision 3220-D01-2015 (March 5, 2015) • 31
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
associated K factor calculations, as the details of the capital tracker mechanism were not known
until December 2013. Additionally, the Commission noted earlier in this section that the need for
any of the five projects or programs deferred from 2013 to 2014 or 2015, listed in Table 4 above,
was not approved in Decision 2013-435.
118. In addition to considering why a project has been delayed, paragraph 96 of Decision
2014-373 also indicated that the Commission must consider whether there is a continuing
necessity to complete the proposed project to maintain service quality and safety. In the
respective parts of Section 7 of this decision, for each of the five projects or programs deferred in
2013, other than the fact that certain aspects of these projects were delayed from 2013 to 2014
and 2015, the Commission finds that these projects or programs were required in 2013 and are
required to continue in 2014 and 2015.
119. Overall, the Commission finds that the “uncertainty as to the nature and extent of capital
tracker treatment” is not a valid business reason for Fortis to have delayed the work planned for
2013. However, given the above considerations, the Commission will not disqualify from capital
tracker treatment the five 2013 capital tracker projects or programs delayed, in whole or in part,
in 2013. With respect to the portion of these five projects or programs completed in 2013, the
Commission will consider the prudence of the actual 2013 capital additions as part of the 2013
capital tracker true-up process in this decision. In addition, the Commission will consider, for
capital tracker treatment in 2014 and 2015, the portions of the five projects or programs deferred
from 2013 into 2014 and 2015.
120. In response to a Commission information request, Fortis stated that due to the short
duration of the 2013 deferrals, it did not expect any meaningful increase in costs over time.126
During the hearing, Fortis acknowledged that unit costs of the deferred projects (e.g., labour and
materials) will increase by inflation. However, Fortis maintained that these increases in cost will
be largely offset by its productivity improvements, possibly even leading to a decline in unit
costs.127 At the time of Fortis’ 2014 and 2015 capital tracker true-up applications, the
Commission will consider the prudence of the actual costs for the five projects or programs
deferred in 2013, including any additional net costs that could have been avoided had the
projects proceeded in 2013, as planned.
121. The UCA expressed its view that, pursuant to the Commission’s determinations in
paragraph 594 of Decision 2012-237, “the existence of a reasonable level of management
discretion is an indicator that a specific project should not be approved for inclusion in the
Capital Tracker.” The UCA supported the view of Mr. Shymanski that the deferral of some of
Fortis’ proposed capital tracker projects in 2013, absent extenuating circumstances in the nature
of extreme weather or other emergency-type situations, “is a clear indication of a reasonable
level of management discretion.”128
122. The Commission considers that the UCA’s interpretation is too restrictive in the
circumstances of most capital programs. As the Commission indicated in paragraph 96 of
Decision 2014-373 referenced above, it may be the case that the project was determined to be no
longer necessary in a prior period, or there may have been a valid business reason to defer the
project, even though it was required. In this proceeding, Fortis pointed out that “there have been,
126
127
128
Exhibit 78.02, AUC-FAI-2(g).
Transcript, Volume 2, pages 330-333 (Mr. Eck and Mr. Lorimer), as corrected in Exhibit 126.01.
Exhibit 3220-X0003, UCA argument, paragraph 37.
32 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
and will continue to be, delays and advances to capital projects that are beyond the control of
FortisAlberta. There have also been, and will continue to be, delays and advances to capital
projects that are within FortisAlberta’s control, but are a reasonable thing to do.”129 As an
example of an event outside of its control, Fortis highlighted that the timing of projects under the
Substation Associated Upgrades program is determined by the related timing of the transmission
substation upgrades.130 For an example of an event within its control, Fortis indicated that the
Sundre substation project was carried over into a subsequent year because of work crew
availability and weather concerns.131
123. The Commission agrees with Fortis’ view that valid business reasons for altering a
project’s schedule cannot be limited to a force majeure type of situation identified by
Mr. Shymanski, such as “extreme weather” or an “extreme emergency-type of a situation.”132
Consistent with the treatment of capital expenditures under the cost-of-service regime, the
Commission accepts that a company may exercise some reasonable judgement in implementing a
particular project, in line with industry standards and prudent business practices. This judgement
may be influenced by factors both within and outside the company’s control.
124. In these circumstances, the Commission finds that limiting management discretion to a
force majeure or emergency types of situations identified by Mr. Shymanski may prevent the
company from selecting the best course of action, including the best timing, to achieve the least
cost alternative for a particular capital tracker project. Under the requirements of Criterion 1, the
company is charged with presenting compelling evidence that the scope, level, and timing of the
proposed capital tracker project or program is prudent and that the forecast or actual costs are
reasonable. As a result, the prudence of any changes to the project schedule and the resulting
actual costs will be considered at the true-up stage. Fortis pointed out that because of the true-up
process for capital tracker projects, customers will not be harmed when the actual timing of
projects varies from forecast.133
125. In his written evidence, Mr. Shymanski observed that Fortis did not complete some of the
projects under the Substations Associated Upgrades program in years originally planned, due to
various reasons other than “uncertainty as to the nature and extent of capital tracker treatment”
and recommended removing the carryover costs associated with these projects from the 2013 and
2014 K factor calculations.134 The Commission will consider this recommendation of Mr.
Shymanski in Section 6 of this decision, dealing with project assessment under Criterion 1.
Specifically, consistent with the determinations above, the Commission will consider whether
the delay of some of the projects under the Substations Associated Upgrades program was driven
by a valid business issue and thus, was a prudent course of action.
126. In his written evidence,135 Mr. Shymanski also stated that the expenditures on the five
projects or programs deferred from 2013 to 2014 and 2015, should not be allowed capital tracker
treatment because these projects do not meet the Criterion 1 requirement that “in the absence of
129
130
131
132
133
134
135
Exhibit 99.02, Fortis rebuttal evidence, paragraph 118.
Exhibit 3220-X0001, Fortis argument, paragraph 187.
Transcript, Volume 3, page 385, lines 2-6 (Mr. Eck).
Transcript, Volume 4, page 737 lines 1-8 (Mr. Shymanski).
Exhibit 3220-X0001, Fortis argument, paragraph 187.
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 11 and 14.
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 12-13.
Decision 3220-D01-2015 (March 5, 2015) • 33
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
the proposed capital expenditures, deterioration in service quality and safety would result,”136 as
set out in Decision 2013-435. The UCA supported this recommendation in its argument. In this
regard, the Commission observes that Mr. Shymanski’s and the UCA’s view appear to be based
on their interpretation of Criterion 1 that the deterioration in service quality and safety would
result in the year for which capital tracker treatment is sought.137 As explained in Section 6 of this
decision, the Commission does not agree with this interpretation.
127. As noted above, the Commission will examine the prudence of Fortis’ capital additions
associated with the 2014 and 2015 capital tracker projects (including work deferred from 2013)
at the time of the 2014 and 2015 capital tracker true-up applications. In assessing the prudency of
the 2014 and 2015 capital additions, the Commission will consider all relevant factors, including
any effect arising as a result of the deferral of 2013 projects. The Commission will also consider
the fact that Fortis was able to defer some projects in 2013 when assessing the need and actual or
forecast costs for the five capital projects that were delayed, in whole or in part, from 2013 into
2014 and 2015.
7
Project assessment under Criterion 1 – the project must be outside of the normal
course of the company’s ongoing operations
128. As discussed in Section 3 of this decision, each of Fortis’ projects or programs proposed
for capital tracker treatment will be evaluated against the project assessment requirements of
Criterion 1. The purpose of the project assessment is to demonstrate that a project proposed for
capital tracker treatment is (i) required to provide utility service at adequate levels and, if so,
(ii) the scope, level and timing of the project are prudent, and the forecast or actual costs of the
project are reasonable.138
129. Fortis’ applied-for capital trackers in the present 2013-2015 capital tracker application
can be broadly divided into two categories. The first category consists of applied-for projects or
programs for which the Commission confirmed the need as part of its project assessment in
Decision 2013-435. The second category consists of projects or programs implemented in 2013,
or to be implemented in 2014 or 2015, for which the need have not been previously approved in
Decision 2013-435.
130. As also noted in Section 3, for the purposes of the true-up of the 2013 capital tracker
projects for which the Commission confirmed the need as part of its project assessment in
Decision 2013-435, if there is no evidence on the record of this proceeding demonstrating that a
project was not required in 2013, then there is no need to demonstrate that a project was needed
in order to provide utility service at adequate levels in 2013. However, the second part of the
project assessment under Criterion 1 is still required so that the Commission can be satisfied that
the scope, level and timing of each project was prudent, and the actual costs of the project were
prudently incurred.
131. For any new projects in 2013 not previously evaluated in Decision 2013-435, the
Commission will undertake assessments with respect to all three criteria for capital tracker
treatment, including the need for the project.
136
137
138
Decision 2013-435, paragraph 1092 c.
Exhibit 3220-X0003, UCA argument, paragraph 39.
Decision 2013-435, paragraph 278.
34 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
132. With respect to projects or programs proposed for capital tracker treatment in 2014 or
2015 on a forecast basis, the applicant must satisfy all of the Commission’s requirements for the
project assessment under Criterion 1. To that end, a business case and an engineering study will
generally aid the Commission in conducting project assessments under Criterion 1. However, as
discussed in Section 3, in those instances where a project or program is part of an ongoing,
multi-year program, or if a project or program is of an annual, recurring nature (e.g., relocations)
for which the need has been previously approved by the Commission for purposes of capital
tracker treatment, in the absence of evidence that the ongoing or recurring project or program is
no longer required, the Commission will not undertake a reassessment of need under Criterion 1.
133. Fortis provided a business case for each of its projects or programs proposed for capital
tracker treatment in 2014 or 2015. In its business cases, as supplemented by other evidence filed
in the proceeding, Fortis has generally provided an assessment of proposed capital tracker
projects consistent with the minimum filing requirement guidelines set out in Section 10.2 of
Decision 2013-435.139
134. The Commission has evaluated the Fortis business cases, cost related information, and
related evidence and argument against each of the project assessment minimum filing
requirements. However, for the purposes of this decision, the Commission has commented only
on those aspects of the minimum filing requirements that the Commission considers are
insufficiently addressed by Fortis’ evidence or were otherwise raised as an issue in the
proceedings. In future capital tracker applications, Fortis should continue to provide similar
information with respect to each of the minimum filing requirements, including business cases,
engineering studies and cost related information, including costs by cost category, unit costs and
historical cost comparators, in sufficient detail to allow an evaluation of the reasonableness of its
forecasts and the prudence of its incurred costs.
135. The balance of this section is organized as follows: Section 7.1 deals with common issues
related to the project assessment of Fortis’ projects, such as common elements in Fortis’ capital
expenditure forecasts and the amount of capitalized overhead and its allocation to capital tracker
projects. The Commission’s project assessment under Criterion 1 of Fortis’ projects or programs
proposed for capital tracker treatment based on actual capital additions in 2013 or based on a
forecast of capital additions in 2014 and 2015, is set out in Section 7.2.
7.1
Common issues
7.1.1
Common elements in Fortis’ capital expenditure forecasts
136. In its business cases, Fortis indicated the forecasting method for each of its projects or
programs proposed for capital tracker treatment. Fortis indicated that it used the same forecasting
methods for each of its capital projects or programs as approved by the Commission in prior
tariff applications. In general, Fortis’ forecast of capital expenditures is based on the following
three methods:140
a. Unit costs, adjusted for inflation, multiplied by a forecast of volume. For example,
this method is used to forecast customer growth expenditures.
b. Inflation-adjusted normalized three-year averages of capital expenditures. For
example, this method is used to forecast urgent repairs.
139
140
Decision 2013-435, paragraph 1092.
Exhibit 63, application, paragraph 101.
Decision 3220-D01-2015 (March 5, 2015) • 35
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
c. Cost estimates based on the project scope from a planning study or business case. For
example, this method is used to forecast substation associated upgrades.
137. Table 5 shows the common assumptions that were used in Fortis’ 2014-2015 capital
forecast process.
Table 5.
Common assumptions in Fortis’ 2014-2015 capital forecasts141
Alberta consumer price index (CPI)
Gross domestic product (GDP)
Housing starts
2014
forecast
2015
forecast
1.9%
3.4%
37,571
2.0%
3.1%
35,070
138. Fortis noted that in determining cost estimates and completing the related work in the
field, it has established appropriate methods to ensure that capital and operating expenditures are
reasonable. Specifically, Fortis stated that as an APEGA permit holder, the company maintains a
Professional Practice Management Plan (PPMP) outlining corporate policies and systems that
ensures compliance with appropriate engineering standards, regulations and due diligence.
Fortis’ PPMP includes the application of pre-engineered standards and the Quality Management
Plan (QMP). Pre-engineered standards facilitate the efficient design and construction of projects,
and the QMP audits facilitate compliance to these standards. According to Fortis, the result is the
cost-effective construction, operation, and maintenance of a safe and reliable electric distribution
system. Additionally, Fortis stated that its Distribution Design and Construction Standards,
Service and Metering Guide, and Customer Terms and Conditions serve as the foundation for the
company’s provision of safe, reliable service at reasonable cost.142
139. Fortis stated that under sections 105 and 127 of the Electric Utilities Act, Fortis, as the
owner of an electric distribution system, is obligated to operate and maintain its system in a safe
and reliable manner, and to provide and maintain service that is safe, adequate, and proper.
140. Fortis further explained that in addition to certain cost minimization methods specific to
each program or project, as identified within the relevant business cases, Fortis uses the
following general methods to minimize the level of capital expenditures for all of its capital
projects or programs:



141
142
purchasing material from authorized vendors through a competitive procurement
process that includes long-term contracts, thus creating relationships aimed at
minimizing costs from the supply chain while providing quality material in a timely
fashion;
working with vendors to identify opportunities to adopt Economic Price Adjustment
formulas tied to nationally recognized indices, such as those maintained by Statistics
Canada, thus removing the vendors’ requirement to seek price increases and hedge
commodities on long-term contracts;
purchasing industry standard material from recognized vendors to ensure material
quality, and leverage off established vendor supply chains to manage Fortis’ material
levels;
Exhibit 63, application, Table 3 on page 36.
Exhibit 63, application, paragraphs 103-104.
36 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application




FortisAlberta Inc.
engaging power line construction contractors through a competitive process that
includes long-term unit price contracts and project-specific competitive bids;
coordinating work with other projects or maintenance activities, where possible, to
minimize cost and customer outages;
assessing the specific requirements for each project and determining the minimum
level of equipment needed to provide safe and reliable service; and
continuing to review construction methods to optimize on cost reductions; e.g.,
procurement versus rental of rigging mats and reusing material, where appropriate.143
141. Finally, Fortis pointed out that in Decision 2013-435, the Commission accepted the
forecasting methods for the Customer Growth, AESO Contributions, and Substation Associated
Upgrades capital tracker programs. Fortis indicated it used the same methods of forecasting
expenditures on these programs as those approved in Decision 2013-435.144
Commission findings
142. The Commission has reviewed the common elements in Fortis’ 2014-2015 capital
expenditure forecasts such as the CPI escalators, GDP growth rates, and housing starts and finds
them reasonable.
143. The Commission acknowledges that Fortis, as an APEGA permit holder, maintains a
Professional Practice Management Plan outlining corporate policies and systems that ensures
compliance with engineering standards, regulations and due diligence. Fortis’ PPMP includes the
application of pre-engineered standards and the Quality Management Plan. As Fortis explained,
pre-engineered standards facilitate the efficient design and construction of projects, and the QMP
audits facilitate compliance to these standards. Accordingly, the Commission accepts Fortis’
submissions that the PPMP and QMP help facilitate the cost-effective construction, operation,
and maintenance of a safe and reliable electric distribution system.
144. Additionally, Fortis indicated that it uses certain general methods to minimize the level of
capital expenditures for all of its capital projects or programs. For example, Fortis indicated it
relies on a competitive procurement process to purchase materials from authorized vendors and
engage power line construction contractors.145 The Commission finds that such measures provide
further reassurance to support Fortis’ contention that the scope, level, timing and costs of
forecast capital projects are reasonable and that actual costs are prudently incurred.
7.1.2
Capitalized overhead and allocation
145. In its application, Fortis provided a combined amount for the allowance for funds used
during construction (AFUDC) and capitalized overheads for each project but did not discuss the
level of overheads. In the revenue requirement schedules of Appendix B, there was no mention
of overhead.
146. In information requests, the CCA requested details regarding capitalized overheads and
Fortis provided two detailed schedules.
143
144
145
Exhibit 63, application, paragraph 105.
Exhibit 63, application, paragraphs 108, 110 and 112.
Exhibit 63, application, paragraph 105.
Decision 3220-D01-2015 (March 5, 2015) • 37
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
147. The CCA addressed capitalized overhead in evidence. The CCA submitted that the full
details that it had requested were not provided in Fortis’ information response.146 The CCA
submitted that Fortis was applying for in excess of $113 million, over three years, in capitalized
overheads with limited or no details to support the request.147 The CCA recommended that
overhead costs be denied unless further information was provided.148
148.
The UCA did not address this topic in its evidence.
149.
In rebuttal evidence, Fortis submitted:
FortisAlberta has calculated capitalized overhead in a manner consistent with the
Company’s Capitalized Overhead Study (approved as part of Decision 2010-309), and in
accordance with International Financial Reporting Standards (IFRS) and AUC Rule
026.[149] This same approach formed the basis for the 2012 Going-in Rates.150
…the CCA is effectively seeking to re-do or re-open the capitalization of overhead as
calculated in accordance with the last-approved study and as reflected in going-in rates. A
capital tracker application is not the appropriate place to reconsider approved overhead
capitalization methods.151
The CCA evidence indicates that the capital tracker portion of the capitalized overhead
costs have increased to 86% in 2014 and 87% in 2015. … The correct forecast of
capitalized overhead amount for 2014 and 2015 for capital trackers is based on the
correct percentages of 87% and 88% respectively.152
Capitalized overhead is a function of the capital additions associated with each capital
program or project. The percentage attributable to capital trackers is not unusual given
FortisAlberta’s required capital expenditures. …as a percentage of net additions, the
capitalized overhead remains consistent between 2008 and 2015.153
FortisAlberta is seeking approval of the total capitalized overhead amount related to
capital trackers, which is the sum of the total capitalized overhead deferral and the total
capitalized overhead included in expenditures for each capital tracker.154
The sum of the amounts in the two attachments provides the total capitalized overhead
for each capital project, and the total can be easily calculated by adding the two
amounts.155
In terms of the allocation process, FortisAlberta confirmed in CCA-FAI-003(a) that the
capitalized overhead deferral is allocated to the project groupings based on the proportion
of capital additions to total capital additions. FortisAlberta further confirmed that directly
146
147
148
149
150
151
152
153
154
155
Exhibit 81.01, CCA evidence, paragraph Q3A.
Exhibit 81.01, CCA rvidence, paragraph Q4A.
Exhibit 81.01, CCA evidence, paragraph Q6A.
Rule 026: Regulatory Account Procedures Pertaining to the Implementation of the International Financial
Reporting Standards.
Exhibit 92.02, Fortis rebuttal evidence, paragraph 4.
Exhibit 92.02, Fortis rebuttal evidence, paragraph 6.
Exhibit 92.02, Fortis rebuttal evidence, paragraph 9.
Exhibit 92.02, Fortis rebuttal evidence, paragraphs 10 and 11.
Exhibit 92.02, Fortis rebuttal evidence, paragraph 14.
Exhibit 92.02, Fortis rebuttal evidence, paragraph 24.
38 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
attributable overhead costs are capitalized to projects in accordance with IFRS.
Consistent with past practice, the overhead amounts are charged to capital projects based
on capital expenditures.156
150. Fortis noted that the AUC approved its capitalized overhead deferral in Decision
2010-309 at paragraph 321.157 This referred to the portion of overhead that had been capitalized
under Canadian GAAP but could not be directly capitalized under IFRS.
151. In argument, the CCA submitted that the tracker share of capitalized overheads (or assets
related to capital trackers) had increased in 2015 to 88 per cent from 71 per cent in 2010.158
Since capitalized overhead is a component of all capital there is an incentive to move
overhead from the capped [tracker] pool to the uncapped [non-tracker] pool.159
…after remaining flat for two 15.years the capitalized overhead allocation percentage rate
increased by 10% from 2012 to 2013 and a further 18% increase from 2013 to 2014.160
...
The 2014 net capital additions are roughly 12% lower than the previous year yet the
[overhead] allocation percentage increases 30%.161
152. The CCA indicated that Mr. Lorimer’s explanation that the overhead rate varied due to
variations in the level of AESO contributions could not be confirmed when the CCA looked at
the numbers.162
153.
In argument, Fortis reiterated what it had said in rebuttal evidence and concluded:
FortisAlberta submits that, based on the evidence in this Proceeding, the requests of the
CCA in respect of capitalized overhead matters should be denied for the detailed reasons
set out above. Additionally, were the CCA to prevail in its requests, then what would
inhibit the CCA or another intervener from demanding similar calculations of additional
matters, such as all depreciation dollar amounts that form part of each capital tracker in
the next capital tracker process to allegedly confirm that applicants are indeed applying
approved depreciation rates? The goal of reducing regulatory burden over time would be
taking a major step in the wrong direction, for no perceptible gain.163
154.
In reply argument, the CCA submitted:
Fortis has conflated performing an overhead study and determining the appropriate
allocators and percentages to be used with the simple act of showing a reconciliation of
the underlying cost pool from which overhead costs are drawn, the allocations therefrom,
and the projects and groupings where the overhead costs are allocated to. How Fortis is
able is change, reconfigure or otherwise morph this request, and Fortis’s own witness,
into an assertion that the CCA is asking to have the overhead study redone is beyond
156
157
158
159
160
161
162
163
Exhibit 92.02, Fortis rebuttal evidence, paragraph 25.
Exhibit 92.02, Fortis rebuttal evidence, paragraph 16.
Exhibit 3320-X0004, CCA argument, paragraph 12.
Exhibit 3320-X0004, CCA argument, paragraph 14.
Exhibit 3320-X0004, CCA argument, paragraph 15.
Exhibit 3320-X0004, CCA argument, paragraph 18.
Exhibit 3320-X0004, CCA argument, paragraphs 19-21.
Exhibit 3220-X0001, Fortis argument, paragraph 103.
Decision 3220-D01-2015 (March 5, 2015) • 39
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
comprehension. Further, Fortis’s refusal to provide this information is contrary to the
Commission’s minimum filing requirements which state in part:
Applicants shall provide copies of studies and supplementary information used in
the preparation of the application and related forecasts. Typical information may
include:
…
• Overhead Study;
• Overhead Calculations;164
…
Following Fortis’s logic, future applications for capital trackers should simply involve
one piece of paper which states that Fortis has complied with all requirements for capital
trackers and a request to just send money. In the CCA’s view, that is basically Fortis’s
application for $130 million in overhead costs. Fortis states it is complying with past
practice, the overhead rate is consistent and it shows the end result numbers. Period, full
stop. That is the extent of their evidence to support $130 million in costs. This is contrary
to established regulatory practice, the Commission’s minimum filing requirements and a
recent Alberta Court of Appeal finding which states:
[149] The traditional common-law presumption is that he who asserts
must prove. Subject to the powers of the respondent Commission to use
its own experience and expertise, or gather information for itself, that
must be correct and logical. First, it is usually almost impossible to prove
a negative.165
…
Second, as discussed in the CCA’s argument28 the little information that Fortis did
provide respecting the 30% increase in PBR over pre-PBR overhead allocation rates did
not support the increase in the overhead allocation rate. Given the limited information
provided by Fortis, the CCA could not take its argument any further for the reason the
Alberta Court of Appeal stated “…it is usually almost impossible to prove a negative.“
The CCA is severely disadvantaged by Fortis’s lack of disclosure.166
Commission findings
155. In Decision 2014-373, dealing with AltaGas’ 2013-2015 capital tracker applications, the
Commission found:
The Commission considers that overhead costs are a component of capital additions and,
as such, the company is required to demonstrate that those costs are prudent, as it would
for any other capital addition costs. In order to do this, the company must provide a
listing of the items that make up the overhead pool and provide calculations to show how
the overhead rate used to allocate the overhead pool to capital projects is determined.
Given the information on overhead calculations included in AltaGas’ applications, and
the many information requests related to overhead calculations, including the response to
CCA-AUI-2(b), the Commission considers that AltaGas has satisfied this requirement,
for the purpose of this decision.
164
165
166
Exhibit 3220-X0008, CCA reply argument, paragraph 44.
Exhibit 3220-X0008, CCA reply argument, paragraph 50.
Exhibit 3220-X0008, CCA reply argument, paragraph 53.
40 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
In future capital tracker applications, in order to demonstrate the reasonableness and
prudence of overhead costs, AltaGas is directed to provide its overhead calculations
separately, identifying a line item for each of the specific items indicated in its response
to CCA-AUI-2(b) in Proceeding No. 3244. The company must also be prepared to
explain any significant year-over-year changes in the items that make up the overhead
pool. To the extent that a company limits the year-over-year increases to an item in the
overhead pool to I-X, as AltaGas has done with inter-affiliate costs, the Commission
considers that to be a reasonable approach for capital tracker purposes. However, a
company is not required to limit its increases to its overhead items to I-X if it can
demonstrate that an increase in excess of this amount is prudent.167
156. Fortis has submitted that the level of detail requested by the CCA is excessive and that
the Commission should rely on Fortis’ confirmation that overheads have been applied in a
manner consistent with Fortis’ previously approved capitalized overhead study and in
accordance with IFRS and Rule 026. Fortis also submitted that this approach formed the basis for
the 2012 going-in rates. Fortis indicated that it is seeking approval of the total capitalized
overhead amount related to capital trackers, which is the sum of the total capitalized overhead
deferral and the total capitalized overhead included in expenditures for each capital tracker.
157. The Commission agrees with the CCA that Fortis has not demonstrated that its
capitalized overhead costs are prudent. This is the case because these costs were not addressed in
the application and detailed information was not provided in response to the CCA’s request. In
the absence of evidence supporting overhead costs, the Commission cannot approve an increase
in overhead costs in excess of the previous year’s amount adjusted by I-X. In future capital
tracker applications, adjustments for overhead costs in excess of I-X would require evidence
demonstrating this higher level of costs.
158. Regarding the capitalization of the pool of overhead costs and its allocation to capital
expenditures, including capital tracker projects, the Commission agrees with Fortis that
demonstrating that overhead costs were capitalized and allocated in the same manner approved
by the Commission in Fortis’ last DTA, as reflected in the going-in rates, is sufficient. As such,
the Commission accepts Fortis’ current capitalization and allocation methodology.
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 company’s
capitalization and allocation methodologies.
160. In the following sections of this decision, the Commission approves certain projects and
programs for capital tracker treatment, and approves the actual or forecast capital expenditures
for each of these programs or projects. These approvals are conditional upon and subject to the
direction above requiring the company in its compliance filing to recalculate the total pool of
overheads to be allocated to Fortis’ 2013 actual capital expenditures and 2014-2015 forecast
167
Decision 2014-373, paragraphs 390-391.
Decision 3220-D01-2015 (March 5, 2015) • 41
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
capital expenditures, including capital tracker projects, consistent with the company’s
capitalization and allocation methodologies.
161. Fortis noted that the Commission approved its capitalized overhead deferral in Decision
2010-309 at paragraph 321.168 In its next capital tracker application, Fortis is directed to explain
the nature of this overhead deferral account and the effects of the deferral on the revenue
requirement for capital tracker projects for each year under PBR.
7.2
Assessment of individual projects
7.2.1
Customer Growth program
162. This program relates to the installation of wires (overhead or underground), transformers,
meters, and related facilities to connect new customers and to upgrade existing connections for
growth as needed. Fortis provided an overview of this program in its application and provided
additional details and analysis in Appendix A-1. Attachments to Appendix A-1 included the
Metering Guide, a sample construction standard, a sample customer connection design and the
Underground Residential Development Manual.
163. Fortis is applying for capital tracker treatment for this program in 2013 on an actual
expenditures basis and in 2014 and 2015 on a forecast expenditures basis. The actual capital
expenditures for 2013 were $136.2 million with net capital additions of $137.4 million. Total
capital expenditures are forecast at $144.1 million in 2014 and $150.1 million in 2015 with net
capital additions of $135.3 million in 2014 and $142.3 million in 2015.
164. The costs of this program are calculated by forecasting the expected number of new
connections and service upgrades and multiplying that by unit cost rates. Fortis explained how it
forecasts the number of new service connections:
New Service Locations are forecast based on Alberta housing starts, real GDP growth
and historical trends for each rate class, with the exception of large General Service (Rate
63) customers. The forecast for New Service Locations in the Rate 63 category (greater
than 2 MW) is based on discussions with customers in that rate class regarding their
future plans… .169
165. The following table shows the 2013 through 2015 forecasts for housing starts and real
GDP growth. Fortis’ forecast of key economic indicators was based on an average of forecasts
from RBC (December 2013), BMO (November 2013), Scotia (November 2013), TD (October
2013), CBOC (December 2013), CMHC (Q4 2013), CBIC (October 2013), and the Alberta
Budget 2013-16:
Table 6.
Alberta economic indicators
Housing starts
Real GDP growth
168
169
2013
forecast
35,471
2014
forecast
37,571
2015
forecast
35,070
3.0%
3.4%
3.1%
Exhibit 92.02, Fortis rebuttal evidence, paragraph 16.
Exhibit 3, Appendix A-1 Customer Growth Program, page 12.
42 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
166.
FortisAlberta Inc.
The forecast number of new service connections are provided in the following table:
Table 7.
Number of new service connections and the percentage change170
Rate 11 – Residential
Rate 21 – Farm
Rate 26 – Irrigation
Rates 41 through 63 – General Service/Oil & Gas
Total
2013
actual
9,904
313
181
2,301
12,699
2014
forecast
9,967 (+0.6%)
309 (-1.3%)
179 (-1.1%)
2,378 (+3.3%)
12,833 (+1.1%)
2015
forecast
9,352 (-6.2%)
302 (-2.3%)
175 (-2.2%)
2,431 (+2.2%)
12,260 (-4.5%)
167. Based on the above table, Fortis is forecasting that the number of service connections in
2014 and 2015 will remain within three per cent of the actual numbers realized in the prior year,
with the exception of a forecast 6.2 per cent decrease in new residential connections in 2015.
168. Fortis explained that the unit costs per service connection for 2014 and 2015 are based on
the rolling 12-month average unit cost per new service location for each customer category
escalated by forecast inflation for 2014 and 2015.171 The resulting costs per unit are provided in
the following table:
Table 8.
Capital costs per unit to connect new customers172
Rate class
2013
actual
2014
forecast
2015
forecast
($000)
Rate 11 – Residential
3.3
3.3
3.4
Rate 21 – Farm
22.5
22.9
23.3
Rate 26 – Irrigation
37.1
37.8
38.6
Rates 41 through 63 – General Service/Oil & Gas
54.6
57.1
59.8
169. The total spending by class (before contributions) is found by multiplying the number of
connections by its unit cost. The expenditures and contributions by rate category are provided in
the following table:
170
171
172
Exhibit 3, Appendix A-1, Customer Growth Program, Table 4, page 13.
Exhibit 3, Appendix A-1, Customer Growth Program, page 13.
Exhibit 3, Appendix A-1, Customer Growth Program, Table 4, page 13.
Decision 3220-D01-2015 (March 5, 2015) • 43
2013-2015 PBR Capital Tracker Application
Table 9.
FortisAlberta Inc.
Customer Growth program capital expenditures summary
2013
actual
2014
forecast
2015
forecast
($ million)
Customer growth expenditures
171.8
182.9
190.9
32.3
33.2
31.7
Rate 21 – Farm
7.0
7.1
7.0
Rate 26 – Irrigation
6.7
6.8
6.7
125.7
135.9
145.4
Customer contributions
(35.6)
(38.8)
(40.8)
Rate 11 – Residential
(6.2)
(6.4)
(5.8)
Rate 21 – Farm
(1.2)
(1.2)
(1.2)
Rate 26 – Irrigation
(0.4)
(0.4)
(0.4)
(27.8)
(30.7)
(33.4)
136.2
144.1
150.1
Rate 11 – Residential
Rates 41 through to Rate 63
Rate 41 through Rate 63
Total
170. Based on the above table, the fourth category, Rate 41 through to Rate 63 (general
service/oil and gas), accounts for about 75 per cent of the total expenditures for customer growth.
Rate 11, residential, accounts for about 18 per cent, while rates 21 and 26, farm and irrigation,
respectively, each account for about three per cent of total expenditures.
171. The following table illustrates how expenditures, customer contributions, construction
work in progress (CWIP) and capitalised AFUDC and capitalised overheads contribute to the
capital addition amounts for each year.
Table 10. Customer Growth program - net capital expenditures and additions173
2013
actual
2014
forecast
2015
forecast
($ million)
Capital expenditures
171.8
182.9
190.9
Customer contributions
(35.6)
(38.8)
(40.8)
Net capital expenditures
136.2
144.1
150.1
4.6
(2.9)
(1.7)
(12.8)
(18.3)
(19.0)
9.4
12.4
12.9
137.4
135.3
142.3
CWIP
Retirements
Capitalized AFUDC and overhead
Net capital additions
172. The net capital expenditures for the customer growth program are forecast to increase by
5.8 per cent in 2014 and a further 4.2 per cent in 2015. Net capital additions decrease by
1.5 per cent in 2014 and then increase by 5.2 per cent in 2015.
173
Exhibit 63, application, Table 5, paragraph 133.
44 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
173. In its application, Fortis provided details on the forecast-to-actual variance in customer
growth capital expenditures for each year from 2008 to 2012. The variance for 2013 was
provided in a response to Commission information request AUC-FAI-001. The percentage
expense variance in the program, by year, is as follows:
Table 11. Customer Growth program – expenditure variances by year
Overspent, prior to
contributions
(%)
Overspent, net of
Contributions
(%)
Explanation
2008
9
18
More generous irrigation investment policy
2009
13
43
More generous irrigation investment policy
2010
60
66
2011
48
34
2012
29
26
Higher oil & gas connections
2013
(2)
(4)
Fewer oil & gas connections
174.
Higher residential and oil & gas
connections
Higher residential and oil & gas
connections
The following is a brief summary of the variance explanations provided by Fortis.

A (then newly approved) more generous investment policy for Irrigation customers led to
higher-than-forecast customer connection costs in 2008 and 2009.

In 2010 and 2011, higher-than-forecast costs were driven by the connection of
substantially more residential and oil and gas customers than expected as the economy
rebounded.

In 2012, the over-spending was driven by oil and gas customers. In the hearing, Mr. Eck
stated that the unit costs are also much higher for oil sands customers.174

For 2013, Fortis explained in AUC-FAI-001 that its net capital expenditures for customer
growth were four per cent lower than forecast due to fewer requests for new services
from Rate 45 (oil & gas) customers.175
175. During the hearing, Mr. Eck testified that this work is done through a combination of its
own workforce and by contractors who work on a unit-price basis and that the contractors are
selected by competitive tender. These costs were escalated by inflation rather than by the
I-X index.176
176. During the hearing, the Commission questioned if the residential and street lighting
customer contribution forecasts had taken into account the fact that the maximum investment
levels for those rate classes were increasing at 10 per cent per year. Fortis testified that the effect
174
175
176
Transcript, Volume 2, page 355 (Mr. Eck).
Exhibit 78.02, AUC-FAI-001.
Transcript, Volume 2, pages 349-351 (Mr. Eck).
Decision 3220-D01-2015 (March 5, 2015) • 45
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
of the change in the investment level was no longer taken into account but that the effect would
be small.177
177. The CCA, in its evidence and in its argument, expressed concerns with the amount of
overhead costs that Fortis allocated to its capital tracker projects or programs. This matter was
dealt with in Section 7.1.2 of this decision. In addition, the CCA, in its argument, expressed
concerns with Fortis’ grouping of its capital tracker projects or programs, as discussed in
Section 5. Besides these two concerns that apply to all of Fortis’ capital trackers, the CCA did
not take issue with anything else associated with the customer growth program.
Commission findings
178. There is no debate that Fortis is required to connect new customers. In addition, the
Commission notes that the scope, level and timing of this program is driven by customer requests
and that Fortis has no ability to control this if it is to respond to connection requests in a timely
manner. This makes these costs difficult to forecast. However, this cost will ultimately be trued
up to actual. The issue for the Commission is to satisfy itself that the actual level of per-unit
costs to connect each customer is reasonable and prudent.
179. Fortis previously applied for capital tracker treatment for this program in 2013, and in
Decision 2013-435, the Commission found:
1021.
… the Commission accepts the need for the customer growth program in 2013.
1022. … The Commission considers that the information provided in Fortis’ three step
forecasting method was useful in assessing the assumptions made by Fortis in generating
its forecast. As part of this forecasting method, Fortis identified how it derived the
forecast units and cost per unit for each customer growth category, allowing the
Commission to assess whether the forecasting assumptions were reasonable. In addition,
the Commission notes that SMi [SMi Faciliop] found the unit costs provided by Fortis to
be “in the range of utility costs we are familiar with.”
1023. … the Commission finds that the proposed scope, level, timing and forecast cost
of the customer growth program, as proposed for 2013, are reasonable. Accordingly, the
Commission finds that this project satisfies the project assessment requirement of
Criterion 1.178 [footnotes removed]
180. Fortis is requesting continuing capital tracker treatment for this program in 2014 and
2015. Where a forecasted program or project is part of a multi-year, on-going program or project,
or if the program or project is of an annual recurring nature, that has previously been approved
for capital tracker treatment, in the absence of evidence that the on-going or recurring project or
program is no longer required, the Commission will not undertake a reassessment of need under
Criterion 1. The Commission found no evidence on the record of Proceeding 3220 to indicate
that the Customer Growth program is not required to continue in 2014 or 2015.
181. With respect to the variance to forecast in 2013 and prior years, the Commission notes
that the variance was modest and negative (under-forecast) in 2013 but was large and positive
(over-forecast) in the years 2008 to 2012. The Commission acknowledges that Fortis cannot
177
178
Transcript, Volume 2, page 352 (Mr. Eck).
Decision 2013-435, paragraphs 1021-1023.
46 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
control the number and types of customers that request service in a given year and that the
economic cycle in Alberta can lead to unexpected peaks and valleys of activity in new home
construction and in the oil and gas industry. Nevertheless, the Commission is concerned about
the persistent and large over-spending in this program for the years prior to 2013. The
Commission notes, however, that Fortis indicated that it improved its forecasting method for
2013 including the use of a 12-month rolling average of unit costs.179 In addition, the
Commission notes that these costs will be trued up to actual.
182. With respect to the scope, level and timing of this program for 2013 to 2015, the
Commission has reviewed Appendix A-1 and the relevant portions of the record for this program
and finds the forecast scope, level and timing of the program for 2013 to be prudent. Interveners
provided no evidence to the contrary and did not argue that the scope, level or timing of this
program was imprudent.
183. The Commission has reviewed the costs of the 2013 actual capital expenditures and
additions for this capital tracker program in light of the evidence supporting these costs, the
associated procurement and construction practices and the evidence explaining the differences
between approved forecast and actual costs, and finds the actual costs to be prudent.
184. The Commission notes that the 2014 and 2015 forecast volumes and unit costs appear
reasonable when compared to the 2013 actual figures. The Commission acknowledges that the
scope, level and timing of customer connections is driven by customer requests and is not under
Fortis’ control. Further, the Commission finds that by using the procurement and construction
practices as set out in its application, the unit costs appear to be reasonable.
185. The actual capital additions of $137.4 million are approved for 2013. The forecast capital
additions of $135.3 for 2014 and $142.3 million for 2015 are approved. The Commission finds
that the Customer Growth program satisfies the need, scope, level and timing and cost aspects of
Criterion 1, on an actual basis for 2013 and on a forecast basis for 2014 and 2015.
7.2.2
AESO Contributions program
186. The AESO Contributions program is required to provide contributions to the AESO for
the construction of transmission facilities that have been approved by the AUC in Fortis’ service
area and which are required to supply load growth in Fortis’ distribution area. Fortis provided an
overview of this program in its application and provided additional details and analysis in
Appendix A-2, which also included five supporting attachments.
187. Fortis is applying for capital tracker treatment for this program in 2013 on an actual
expenditures basis and in 2014 and 2015 on a forecast expenditures basis. Fortis’ AESO
contributions were $88.8 million in 2013, and were forecast at $32.3 million and $97.7 million in
2014 and 2015, respectively.
188. The load growth on Fortis’ distribution system is supplied through the transmission
facilities of AltaLink, which is the transmission facilities owner (TFO). The AESO, AltaLink,
and Fortis collectively evaluate transmission alternatives to supply the aggregate load growth on
Fortis’ distribution system. When required, the AESO applies to the AUC for new or upgraded
transmission facilities necessary to serve customers in Fortis’ service area.
179
Transcript, Volume 2, page 356 (Mr. Eck) and Exhibit 78.02, AUC-FAI-001.
Decision 3220-D01-2015 (March 5, 2015) • 47
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
189. To obtain approval to construct new transmission facilities, the AESO files a needs
identification document (NID) application with the AUC, which includes documentation
describing the alternatives that were considered, including both the transmission and distribution
options, as well as the costs associated with each alternative. The NID applications for projects
in Fortis’ AESO Contributions program for 2013, 2014 and 2015 have been attached as
attachments 1 to 3 in Appendix A-2 of the application.
190. In its response to AUC-FAI-003180 and also during the hearing,181 Fortis provided the
current status of the NID applications submitted by the AESO for its projects in its AESO
Contributions program for the years 2013-2015.
191. Fortis explained that this program is necessary to upgrade the transmission infrastructure
required to serve Fortis’ customers. If these upgrades are not implemented as necessary,
violations to distribution system planning standards or overloaded distribution system
components will occur.
192. The forecast capital expenditures for this program are an aggregate total of the individual
projects’ scope of work described in the NID applications. The capital expenditures for 2013,
2014, and 2015 are based on the most feasible alternative to address the identified issues
discussed in the NID applications.
193. The AESO’s terms and conditions of service determine Fortis’ contribution and the
amount of the AESO’s investment for transmission projects. To determine the AESO
Contributions program’s capital expenditures in 2013, the AESO’s investment level in 2011 was
used. Similarly, the 2014 and 2015 forecasts for the AESO Contributions program’s capital
expenditures were determined using the 2013 AESO investment level.
194. In his evidence, Mr. Shymanski on behalf of the UCA, recommended that Fortis’ projects
carried-over from 2012 to 2013, including this program, not be afforded capital tracker
treatment; and the capital additions effect of the deferral be removed from its 2013 K factor
calculations.182 Mr. Shymanski also made the recommendation that Fortis be directed in a
compliance filing to show projects, including the ones in Fortis’ AESO Contributions program it
was proposing to include in the 2013 capital tracker true-up that were delayed into 2014 or future
years, and if no extenuating factor is present, remove these projects from inclusion in the 2013
capital tracker true-up and resulting K factor calculations.183 These recommendations were
addressed in Section 6 of this decision. Mr. Shymanski did not take any other issue with the
AESO Contributions program.
195. The CCA, in its evidence and in its argument, expressed concerns with the amount of
overhead costs that Fortis allocated to its capital tracker projects or programs. This matter was
dealt with in Section 7.1.2 of this decision. In addition, the CCA in its argument, expressed
concerns with Fortis’ grouping of its capital tracker projects or programs, as discussed in
Section 5. Besides those two concerns that apply to all of Fortis’ capital trackers, the CCA did
not have any specific issue with the AESO Contributions program.
180
181
182
183
Exhibit 78.05.
Transcript, Volume 2, pages 358-360 (Mr. Eck and Mr. Bahry) and Exhibit 113.01, Fortis response to
undertaking, page 360.
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 8-9.
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 12-15.
48 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Commission findings
196. Fortis had previously requested capital tracker treatment for its AESO Contributions
program in the 2013 capital tracker application. In Decision 2013-435, the Commission found
that Fortis had provided sufficient information in order for the Commission to determine the
scope, level, timing and forecast for the program, as proposed for 2013, to be reasonable.
Accordingly, the Commission found that this program satisfied the project assessment
requirement of Criterion 1.184
197. A review of AUC-FAI-003 showed that all of the NID applications for projects in Fortis’
AESO Contribution program in 2013 have been approved by the AUC, demonstrating that these
projects are necessary to provide distribution service at adequate levels. Since the NID
applications are approved on the basis of a review of the need for new transmission facilities and
the alternatives explored, the Commission is satisfied that the actual costs incurred in 2013 are
prudent.
198. Fortis requested capital tracker treatment for this program in 2014 and 2015. Where a
forecast program or project is part of a multi-year, ongoing program or project, or if the program
or project is of an annual, recurring nature, whose need for capital tracker treatment has already
been approved, in the absence of evidence that the on-going or recurring project or program is no
longer required, the Commission will not undertake a reassessment of need under Criterion 1.
Accordingly, the Commission finds no evidence on the record of this proceeding to indicate that
the AESO Contributions program is not required to continue in 2014 or 2015.
199. The Commission found Fortis’ cross-referencing of the forecast for AESO Contributions
against the NID applications filed by the AESO for 2014 and 2015 to be useful. Based upon its
review of the business case and the cross-references of Fortis’ contributions against the NID
applications, the Commission finds that the proposed scope, level, timing and forecast cost for
this program for 2014 and 2015 are reasonable.
200. Given the above, the Commission finds that the information provided by Fortis supports a
finding that the scope, level, timing and forecast costs for the AESO Contributions program are
reasonable as proposed for 2013-2015. Accordingly, the Commission finds that this program
satisfies the project assessment requirement of Criterion 1.
7.2.3
Substation Associated Upgrades program
201. The Substation Associated Upgrades program involves the construction or upgrade of
substation facilities to the interconnected power system. When Fortis’ planning studies show that
an existing AltaLink substation is reaching capacity and can no longer support future load
growth, then Fortis investigates solutions with the AESO and AltaLink to address the expected
load growth. Potential solutions include installing a new substation, increasing the capacity of an
existing substation, or installing a new substation breaker.
202. Fortis is applying for capital tracker treatment for this program in 2013 on an actual
expenditures basis and in 2014 and 2015 on a forecast expenditures basis. The actual capital
expenditures for 2013 were $30.5 million with net capital additions of $36.7 million. Total
184
Decision 2013-435, paragraph 1031.
Decision 3220-D01-2015 (March 5, 2015) • 49
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
capital expenditures are forecast at $13.5 million in 2014 and $19.2 million in 2015 with net
capital additions of $11.9 million in 2014 and $18.9 million in 2015.185
203. Fortis stated that aggregate load growth on its distribution system, in certain cases,
requires the construction or an upgrade of substation facilities to continue to provide safe and
reliable service to customers. In these cases, the AESO, AltaLink, and Fortis collectively
evaluate alternatives, and applications are then made to the Commission for new or upgraded
substation facilities required to serve customers. When an existing substation is upgraded or a
new substation is added to provide additional capacity, Fortis constructs new distribution
facilities to connect the substation to the distribution system. The series of projects within this
program are required to ensure capacity to meet customer growth and maintain a safe and
reliable electric distribution system. To obtain approval to construct the new transmission and
substation facilities, the AESO files a NID application with the Commission. This NID
application includes the alternatives that were considered including the transmission and
distribution options, as well as the costs associated with each alternative.
204. Fortis stated that under sections 105 and 127 of the Electric Utilities Act, Fortis, as the
owner of an electric distribution system, it is obligated to operate and maintain its system in a
safe and reliable manner, and to provide and maintain service that is safe, adequate, and proper.
Given these statutory obligations, Fortis stated that if the program is not implemented, then
violations to Fortis’ planning standards or overloaded distribution system components will occur.
Furthermore, this program is required to connect new distribution facilities to new substation
infrastructure approved by the Commission.
205. Fortis provided a substation associated upgrade projects list with costs in excess of
$100,000 for 2013, 2014 and 2015.186 Detailed descriptions and supporting documentation were
also provided for projects with a cost in excess of $300,000, for 2013, 2014 and 2015.187 These
detailed descriptions included an overview of the project, a load forecast of the area affected by
the substation, a detailed cost breakdown of each subcomponent of the project, a description of
the other alternatives considered, a project implementation plan and technical drawings for the
project. Fortis stated that capital expenditures for the program are based on the scope of work
described in each project description for 2013, 2014 and 2015. Fortis provided a detailed cost
breakdown of each subcomponent of projects in excess of $300,000, which provided a
breakdown of the distribution construction capital expenditures for 2013, 2014 and 2015.
185
186
187
Exhibit 14, application, page 2.
Exhibits 15,17 and 19, application.
Exhibits 16, 18 and 20, application.
50 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
206. Fortis provided the substation associated upgrade capital expenditures and net capital
additions to rate base associated with this program for 2013 to 2015, as follows:
Table 12. Substation Associated Upgrades program net capital additions188
2013
actual
Capital expenditures
CWIP
Retirements
AFUDC and Indirect capitalized
overhead costs
Net capital additions
2014
forecast
2015
forecast
30.5
4.4
1.8
($ million)
13.5
(2.1)
0.5
19.2
(0.9)
0.6
36.7
11.9
18.9
207. In response to an information request, Fortis provided a table that identified 17 projects
with the 2013 forecast and actual costs, as follows:
Table 13. 2013 Substation Associated Upgrades program actual and forecast costs189
Recommended development project
Forecast
cost
($000)
Actual
cost
($000)
T10-N050
Leduc 325S - Build one 25-kV feeder from new
substation
1,190
75
T11-N010
New Spruce Grove Area Substation - Build
three 25-kV feeders from new substation
4,078
1,266
T12-N10
Lodgepole 61S - Build two 25-kV feeders from
upgraded substation
3,762
3,955
T12-S10
Sundre 575S - Build one 25-kV feeder from
upgraded substation
3,117
2,325
T12-N20
Moon Lake 131S - Build two 25-kV feeders
from upgraded substation
2,961
2,857
T12-S30
Rimbey 297S - Build one 25-kV feeder from
upgraded substation
317
516
T12-N40
Keystone 384S - Connect existing distribution
system to upgraded substation
47
94
T13-S10
Hull 257S - Build four 25-kV feeders from new
substation
7,653
5,719
T13-N10
Buck Lake 454S - Build two 25-kV feeders
from upgraded substation
5,809
4,043
Project
reference #
188
189
Comment
Decrease in cost as a result of line
route change for feeder and a series
capacitor not required.
Delays as a result of late municipal
approval and substation site
preparation.
No material difference.
Delays as a result of inclement
weather and crew availability.
No material difference.
Less work completed in 2012 than
anticipated, more carried over to
2013.
Increase in cost as a result of
additional labour and material
required for automated metering.
Decrease in cost as a result of lower
labour and construction costs and
line route change resulting in less
line required.
Decrease in cost as a result of lower
labour and construction costs.
Delays as a result of high water
table on substation site.
Exhibit 63, application, Table 9, page 55.
Exhibit 78.03, AUC-FAI-001-01.
Decision 3220-D01-2015 (March 5, 2015) • 51
2013-2015 PBR Capital Tracker Application
Project
reference #
Recommended development project
FortisAlberta Inc.
Forecast
cost
($000)
Actual
cost
($000)
Comment
Increase in cost as a result of
existing facilities at substation site
requiring additional underground
lines.
Increase in cost as a result of
additional labour and material
required for automated metering.
Decrease in cost as a result of lower
labour and construction costs.
Delays as a result of high water
table on substation site.
T13-N20
Whitecourt Industrial 364S - Connect existing
distribution system to upgraded substation
425
1,200
T13-N30
Ponoka 331S - Connect existing distribution
system to upgraded substation
324
407
T13-N40
Onoway 352S - Connect existing distribution
system to upgraded substation
167
113
T13-N50
Cherhill 335S - Connect existing distribution
system to upgraded substation
215
136
T13-S40
Tilley 498S - Build three 25-kV feeders from
upgraded substation
7,585
2,884
T13-N60
Bruderheim 127S - Build two 25-kV feeders
from upgraded substation
677
449
T10-N010
Westwood 422S - Rebuild one 25-kV feeder
from Fort Saskatchewan 54S to reconfigure
distribution system as a result of Westwood
422S.
-
2,283
Carried over from 2012.
T11-N20
New Cherhill Area Substation 338S - Build
three 25 kV feeders from new substation
-
1,844
Carried over from 2012.
Carry-over charges and credits less than
$300,000 each
Total
52 • Decision 3220-D01-2015 (March 5, 2015)
346
38,327
30,512
Decrease in cost as a result of lower
labour and construction costs.
Decrease in cost as a result of
alternate line route resulting in less
line required and lower labour and
construction costs.
Decrease in cost as a result of lower
labour and construction costs.
Delays as a result of high water
table on substation site.
2013-2015 PBR Capital Tracker Application
208.
FortisAlberta Inc.
The following 10 projects were identified for 2014:
Table 14. 2014 Substation Associated Upgrades projects190
Project
reference #
T11-N10
T11-N20
T12-S10
T13-N10
T13-S10
T13-S40
T14-N10
T14-S10
T14-S20
T14-S30
Recommended development project
2013 Carryover - Build three 25-kV feeders out of
new Spruce Grove 595S substation to provide backup supply to the area and address overload of Stony
Plain 434S T1 transformer, feeders 434S-210LS,
434S-481LE, 434S-285LN and 434S-217LE;
Acheson 305S feeders 305S-142L, 305S-394LN and
305S-268LE.
2013 Carryover - Build three 25-kV feeders out of
new Cherhill substation to provide capacity to
Onoway 352S and Mayerthorpe 443S and to facilitate
salvaging of Lac La Nonne 994S and Glenevis 442S.
2013 Carryover - Build one 25-kV feeder out of
upgraded Sundre 575S substation to offload feeders
575S-2008L and 575S-2048L.
2013 Carryover - Build two 25-kV feeders from
upgraded Buck Lake 454S substation to offload T1
transformer, VR1 regulator and feeder 454S-2134L,
and provide back-up supply to the area.
2013 Carryover – Build four 25-kV feeders from new
Hull 257S substation to provide back-up supply to the
area and address overload of feeder 83S-313LN.
2013 Carryover – Build three 25-kV feeders from
upgraded Tilley 498S substation to address overload
of T1 transformer, VR1 regulator and feeders 498S257LE, 498S-2273L and 257LW, and provide backup supply to the area.
2013 SAU carryover costs and credits
Build four 25-kV feeders out of new Nilrem 574S
substation to address overload of Hardisty 377S T1
transformer, feeders 377S- 2103LN, 377S-2103LE;
Tucuman 478S feeders 478S-424L and 478S-251L,
and provide back-up supply to the Hardisty area.
Build two 25-kV feeders out of upgraded Hays 421S
substation to provide back-up supply to the Hays
area and address overload of Hays 421S T2
transformer and feeder 421S-467LE.
Connect existing distribution system to upgraded
Enchant 447S substation to provide back-up supply to
the area.
Connect existing distribution system to upgraded
Spring Coulee 385S substation to provide back-up
supply to the area.
Total
190
AUC
issue
P&L
2014
forecast
($000)
AESO
project
#
$3,698
855
25-Oct-11
1525-Oct-12
Dec-11
$1,991
911
12-May-10
26-Jul21-Apr-11
10
$751
1185
27-Feb-12
09-Mar19-Apr-13
12
$636
1251
12-Oct-12
19-Oct27-May-13
12
$180
1052
06-Nov-12
3018-Jun-13
Nov-12
$155
1254
31-Jan-13
05-Feb05-Apr-13
13
$2,833
1284
16-Sep-13
1817-Jan-14
Sep-13
$2,366
1292
08-Aug-13
2024-Oct-13
Aug-13
$925
1306
01-Aug13
$271
1338
NID file FA file
date
date
($259)
12Dec13
0130-SepAug13
13
1618-Jul-14
Dec13
$13,547
Exhibit 17, application, page 3.
Decision 3220-D01-2015 (March 5, 2015) • 53
2013-2015 PBR Capital Tracker Application
209.
FortisAlberta Inc.
The following nine projects were identified for 2015:
Table 15. 2015 Substation Associated Upgrade projects191
Project
Reference
#
T11-S10
T15-N10
T15-N20
T15-S10
T15-S20
T15-N30
T15-S30
T15-S40
T15-N40
Recommended development project
Carryover - Build two 25-kV feeders out of new
Big Rock 295S substation to provide back-up
supply to the area and address overload of
feeders 678S-349LN, 678S-81LE, 678S-2181L
and 678S-393LW.
Build three 25-kV feeders out of new Edson
Area substation to provide back-up supply to
the area, address low voltage on feeder 397S2114L and offload feeder 58S-153LW.
Build one 25-kV feeder out of upgraded Hayter
277S substation to provide back-up supply to
the area and offload feeder 267S-2055L.
Build three 25-kV feeders from upgraded
Cochrane 291S substation to offload Ghost 20S
T5 transformer, VR1 regulator and feeders
291S-2968T, 793S-2168L, 793S-2169L and
provide back-up supply to the area.
Build one 25-kV feeder out of upgraded Red
Deer 63S substation to provide back-up supply
to the area and address overload of Red Deer
63S T3 transformer and feeders 63S-262LE,
63S-182LS and 214S-28LN.
Build one 25-kV feeder out of upgraded St.
Albert 099S substation to address overload of
feeders 099S-2030L, 099S-278LE, 099S273LW and 099S-2205L.
Build one 25-kV feeder out of upgraded
Strachan 263S substation to provide back-up
supply to the area.
Connect existing distribution system to
upgraded Black Diamond 392S substation to
provide back-up supply to the area.
Connect existing distribution system to
upgraded Pegasus Lake 659S substation to
provide back-up supply to the area.
Total
201[5]
forecast
($000)
1,548
4,424
AESO
project
#
NID file
date
1232
02-May-14
FA file
date
AUC
issue
P&L
15-May31-Mar-15
14
Not
21-Feb14-Feb-15
30-Aug-15
Assigned
15
3,851
1495
23-Sep-14
30-Sep19-Dec-14
14
3,227
1450
02-Aug-14
08-Aug01-Dec-14
14
2,528
1394
31-Mar-14 29-Jul-14 01-Nov-14
1,799
1510
22-Jan-15
29-Jan15
773
1494
10-Nov-14
17-Nov29-May-15
14
677
1218
02-May-14
15-May31-Mar-15
14
327
1294
26-Jul-14
01-Aug01-Dec-14
14
16-Jul-15
19,154
210. Fortis stated that its chosen forecasting methodology was influenced by the scope of
work described in the detailed documents for each project in 2013, 2014 and 2015. In response to
an information request, Fortis stated that the forecast costs for these projects are based on unit
costs and, therefore, cannot be broken down by labour, materials, contractor costs, and overhead
costs. Fortis stated that it uses a planning cost estimate worksheet to estimate the cost of the
project. This planning cost estimate worksheet contains the estimated unit costs to install various
units of capital plant and equipment. This worksheet is updated annually based on actual costs in
the previous year.192 In response to Commission council questioning, Mr. Bahry explained that
191
192
Exhibit 19, application, page 2.
Exhibit 78.02, AUC-FAI-011(b).
54 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Fortis uses unit costs that come out of the planning cost estimating worksheet, so they are order
of magnitude costs that are by units, by length, by kilometre and by installation costs.193
211. When explaining the difference between order of magnitude cost forecasting and unit
cost forecasting, Mr. Eck further clarified that:
… The unit cost is an all-in cost. So for example, we look at the number of structures. So
we have an all-in cost for those structures. We also have unit costs for the kilometres of
line, and those numbers are used within our planning tool to develop those unit costs.
There is a separation as per the response as it pertains to labour, materials, contractors
and overhead costs. The planning tool doesn't have it in that same format. We use it
based on unit costs for the items we're actually installing.194
212. For order of magnitude costs, Mr. Eck explained that those unit costs are based on
previous lines constructed of a similar nature, which is what Fortis refers to as order of
magnitude.195 Therefore, unit costs go into the order of magnitude costs.
213. Mr. Bahry then explained how the unit costs and the order of magnitude costs are forecast
by stating that:
They're actually developed with our project management team, and it's a comparison
between the actual costs and the estimated costs of the overall program, and then it's the
increase or decrease -- or the deviation from those is allocated to our cost estimating
worksheet based on a reconciliation of the differences between the estimated costs and
the actual costs of the overall project delivery.196
…. What we do look at is we rely on our project management team. They deliver 6,000
projects a year. So they're able to identify based on their estimates and what the actuals
come in on those 6,000 projects and look for deviations, and we apply them to our
historical costs -- or the planning cost estimating worksheet units, just as an aggregate. So
we prorate it. Basically it's prorated deviation.197
Again, using that worksheet. Yeah, we update the worksheet units. And as we look at the
particular project, we see it's in unit length. We would multiply the length of the -- line
length with -- against the unit cost to come out with a cost for the project. We sum all the
units on the project and then we roll up all the projects into the program totals. So we
forecast on that basis.198
214. Mr. Eck explained that Fortis’ planning cost estimate worksheet uses unit costs per km of
line based on the most recent projects that Fortis completes.199 Further, Mr. Eck also explained
that:
We look at the actuals versus the forecast, and the actual differential from forecast would
be plus or minus whatever value. That's what our unit cost per km of lines are adjusted…
193
194
195
196
197
198
199
Transcript, Volume 3, page 375, lines 5-11 (Mr. Bahry).
Transcript, Volume 3, page 376, lines 11-21 (Mr. Eck).
Transcript, Volume 3, page 376, lines 23-25 (Mr. Eck).
Transcript, Volume 3, page 377, lines 12-19 (Mr. Bahry).
Transcript, Volume 3, page 377, lines 254-25 and page 378, lines 1-6 (Mr. Bahry).
Transcript, Volume 3, page 378, lines 14-21 (Mr. Bahry).
Transcript, Volume 3, page 379, lines 22-25 (Mr. Eck).
Decision 3220-D01-2015 (March 5, 2015) • 55
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
So let's say we had ten different projects in 2012 and the forecast for those projects was X
amount of dollars, based on the actual costs for each of those projects, if the actual costs
were to increase by 10 percent, we would increase the unit cost for km by 10 percent or
decrease it by 10 percent.
So we're continually adjusting the unit costs for km of line for those types of projects. It
depends on the conductor type if it's double circuit, if it's single circuit.
So each type of line will have a different adjustment every year based on the most recent
actuals estimate forecast.200
215. In an undertaking, Fortis provided its planning cost estimate worksheet for two of the
nine proposed 2015 forecast projects (T11-S10 and T15-N10).201 Fortis explained that from the
planning cost estimate worksheet, the unit costs for these projects are established by design
components such as rural versus urban requirements, underground versus overhead, conductor
type and length, transformers and re-closers. The large scale, complex nature of these projects
make them problematic when attempting to forecast at the level of materials, labour, contractors
and overhead, although these are inherent within each design component unit cost.
216. In the undertaking, Fortis explained that the design component unit costs are a more
appropriate measure for forecasting its projects. Fortis stated that while these projects are
diverse, they have similar design components. The design component unit costs are updated
annually based on actuals and inflation, and their use in the worksheet gives rise to order of
magnitude costs. Subsequent steps in the project delivery process (including site visits and
detailed design) then lead to more fully developed estimates.
217. As discussed in Section 6, the UCA raised concern with the following seven projects that
were deferred or delayed. Fortis provided explanations as follows:
200
201
202
203
204
205
206

Project T11-N10 (New Spruce Grove Area Substation) – the substation was scheduled to
be delivered in 2013 but delays occurred as a result of late municipal approval and
substation site preparation, which was completed by the TFO and not Fortis. This project
will be delivered in 2014.202 The 2013 forecast cost is $4,078,000 and the actual cost is
$1,266,000.203 The 2014 forecast cost is $3,698,000.204

Project T11-N20 (New Cherhill Substation 338S) – this project was carried over from
2012 and was scheduled to be completed in 2013. Due to resource coordination issues
with the TFO, it will now be completed in 2014. The actual cost in 2013 is $1,844,000.205
The 2014 forecast cost is $1,991,000.206

Project T12-S10 (Sundre 575S) – the delay was caused by inclement weather, scheduling
difficulties and limited construction, contractor and crew availability once the project was
Transcript, Volume 3, page 380, lines 1-17 (Mr. Eck).
Exhibit 118.01, response to undertaking on pages 383-384.
3220-X0005, Fortis reply argument, paragraph 25.
Exhibit 78.03, AUC-FAI-009.01 and X3220-0005, Fortis reply argument, paragraph 25.
Exhibit 17, application, Table 1, pages 3-4.
Exhibit 78.03, AUC-FAI-009.01.
Exhibit 17, application, Table 1, pages 3-5.
56 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
initiated.207 The 2013 forecast cost is $3,117,000 and the actual cost is $2,325,000.208 The
2014 forecast cost is $751,000.209

Project T13-N10 (Buck Lake 454S) – the upgrade was scheduled to be completed in 2013
but as a result of delays encountered by the TFO, due to a high water table at the
substation site, civil work was delayed and the transformer oil containment system
became more complex. This project will now be delivered in 2014 with a forecast cost of
$636,000.210 The 2013 forecast cost is $5,809,000 and the actual cost is $4,043,000.211

Project T13-S10 (Hull 257S) – the 2013 forecast cost is $7,653,000 and the actual cost is
$5,719,000, where the decrease in cost is as a result of lower labour and construction
costs and a line route change that resulted in less line being required.212 The 2014 forecast
cost is $180,000.213

Project T13-S40 (Tilley 498S) – the 2013 forecast cost is $7,585,000 and the actual is
$2,884,000. The decrease in cost is as a result of an alternative line route being used,
which required less line, and generated lower labour and construction costs.214 The 2014
forecast cost is $155,000.215

Project T13-N40 (Onoway 352S) – the 2013 forecast cost is $167,000 and the actual
costs is $113,000. The decrease in cost was due to lower labour and construction costs.
Delays were also due to a high water table on the substation site. This project was
completed in 2013, as originally scheduled, and no delay will occur into another year.216
Commission findings
218. In Decision 2013-435, the Commission determined that Fortis must respond to
transmission system developments that require changes to its distribution system facilities. The
Commission also evaluated the alternatives considered in the business case for the substation
associated upgrades program provided by Fortis and was satisfied that the engineering need for
this program was justified.
219.
In Decision 2013-435, dealing with the 2013 program, the Commission found:
1038. The Commission has reviewed the business case and the evidence of SMi with
respect to Fortis’ substation associated upgrades program and considers that the
information provided by Fortis supports a finding that this program is required to
maintain service reliability, quality and safety at adequate levels.
207
208
209
210
211
212
213
214
215
216
Exhibit 3220-X0005, Fortis reply argument, paragraph 27.
Exhibit 78.03, AUC-FAI-009.01.
Exhibit 17, application, Table 1, pages 3 and 6.
Exhibit 78.02, AUC-FAI-009 and Exhibit 17, application, Table 1, pages 3 and 7.
Exhibit 78.03, AUC-FAI-009.01.
Exhibit 78.03, AUC-FAI-009.01.
Exhibit 17, application, Table 1, page 3.
Exhibit 78.03, AUC-FAI-009.01.
Exhibit 17, application, Table 1, page 3.
Exhibit 3220-X0005, Fortis reply argument, paragraph 28 and Exhibit 78.03, AUC-FAI-009.01.
Decision 3220-D01-2015 (March 5, 2015) • 57
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
1039. The Commission finds that the proposed scope, level, timing and forecast cost for
the project, as proposed for 2013, are reasonable. Accordingly, the Commission finds that
this project satisfies the project assessment requirement of Criterion 1.217
220. Where a forecast program or project is part of a multi-year, on-going program, or if the
program is of an annual, recurring nature, that has previously been approved for capital tracker
treatment, in the absence of evidence that the on-going or recurring program is no longer
required, the Commission will not undertake a reassessment of need under Criterion 1.
221. With respect to the scope, level and timing of the program carried out in 2013, the
Commission has reviewed Fortis’ actual net capital expenditures of $30.5 million and capital
additions of $36.7 million for 2013 associated with this program and finds that they are generally
consistent with the scope, level and timing of the work outlined in the business case for this
capital tracker. The Commission has also reviewed the costs of the actual capital additions for
this capital tracker program in light of the evidence supporting these costs and finds the actual
costs to be prudent.
222. With respect to the six delayed capital projects (T11-N10, T11-N20, T12-S10, T13-N10,
T13-S10, T13-S40) and one project that was completed in 2013 (T13-N40), as discussed above,
the Commission has reviewed the explanations provided by Fortis and finds that they are
reasonable. These projects are approved, as filed.
223. Within this program, the Commission has reviewed each project presented in the business
case. The Commission finds that for the purpose of this decision, Fortis has provided sufficient
information to justify the forecast costs for each proposed project within the program that
exceeded $300,000. Included in this information, the Commission has reviewed the overview of
the proposed projects, the load forecast of the area affected by the substation, the detailed cost
breakdown tables for each subcomponent of the project, a description of the other alternatives
considered, the project implementation plan and technical drawings for the project. The
Commission has reviewed Fortis’ Substation Associated Upgrades program and considers that
the information provided by Fortis supports a finding that this program is required to maintain
service reliability, quality and safety at adequate levels. The Commission has reviewed the two
planning cost estimate worksheets that Fortis provided in the undertaking for projects T11-S10
and T15-N10 in the 2015 forecast. The Commission observes that some of the detailed cost
breakdowns of each subcomponent for project T11-S10 and T15-N10 provided in the business
case, differ from the costs provided in the planning cost estimate worksheet for these two
projects. The Commission directs Fortis in its next application to provide its 2016 and 2017
planning estimate worksheet for one project in each year. In addition, Fortis is also directed to
continue to provide its detailed cost breakdown table for that same project and compare line by
line the costs in the table to the costs provided in the planning cost estimate worksheet.
224. For the substations associated upgrade program, the forecast capital additions of
$11.9 million for 2014 and $18.9 million for 2015 are approved. With respect to the scope, level
and timing of this program for 2014 and 2015, the Commission has reviewed the business case
and the relevant portions of the record for this program and finds the forecast scope, level and
timing of the program for 2014 and 2015 to be reasonable.
217
Decision 2013-435, paragraphs 1038-1039.
58 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
7.2.4
FortisAlberta Inc.
Distribution Line Moves program
225. This program is required to fulfill third-party requests for the relocation of existing
distribution lines, as Fortis has agreements in place with government agencies, regulatory bodies,
and individual customers. These agreements articulate the responsibilities of Fortis in relation to
the different types of line moves. Fortis has five categories of distribution line moves that include
transmission initiated line installations, upgrades or rerouting (AltaLink), Alberta Transportation,
urban municipal governments (cities or towns), rural municipal governments (counties or
municipal districts), and customers or independent parties.
226. Fortis is applying for capital tracker treatment for this program in 2013 on an actual
expenditures basis and in 2014 and 2015 on a forecast expenditures basis. The actual capital
expenditures for 2013 were $19.1 million with net capital additions of $14.7 million. Total
capital expenditures are forecast at $26.2 million in 2014 and $27.1 million in 2015 with net
capital additions of $14.9 million in 2014 and $16.7 million in 2015.
227. Fortis stated that it has binding agreements with AltaLink, Alberta Transportation,
municipalities (rural and urban) and customers that outline the requirements for Fortis to carry
out distribution line moves, and dictate when a line move should be carried out, and which party
is responsible for contributions. Fortis is obligated to relocate its distribution assets when
required by a TFO for new or upgraded transmission projects, as approved by the Commission.
Fortis also has a Master Agreement with Alberta Transportation that stipulates that Fortis must
relocate its distribution facilities when required. As a distribution wire owner, Fortis also holds
franchise agreements with various municipalities.
228. When a line move is required, Fortis has an obligation to complete the work. As a result,
there is no alternative. Fortis also does not have the option to refuse line moves as a result of
contractual agreements with Alberta Transportation and municipal governments, transmission
projects that are approved by the Commission, and Fortis’ customer terms and conditions.218
Fortis stated that not proceeding with a line move when requested would lead to non-compliance
with those agreements. In addition, this would delay the construction of projects requiring these
line moves, leading to a decrease in reliability and customer service. Safety hazards and
additional project costs would also arise from not completing the proposed line moves on
schedule.219
229. Fortis provided an overview of this program in the application and five attachments
including the Alberta Transportation Master Agreement, a list of 2013 line move projects
outlining actual costs, a list of 2014 line move projects outlining the forecast costs, the Alberta
Transportation 2013-2016 Business Plan and a project listing of the Alberta Transportation
2013-2016 tentative major construction projects outlining the type of work, the estimated
kilometers and location.
230. Fortis stated that it typically completes the majority of distribution line moves in fewer
than three months. Since a project list was provided for 2014 in the application, Fortis stated that
given the relatively short duration and limited visibility of upcoming distribution line move
projects, a full schedule for these projects for 2014 and 2015 was not available at the time of the
2014-2015 capital tracker forecast application filing.
218
219
Exhibit 22, application, page 16.
Exhibit 22, application, pages 6-7.
Decision 3220-D01-2015 (March 5, 2015) • 59
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
231.
Contributions for distribution line moves were required in the following circumstances:

within municipal districts and counties where the power lines are not within the road
right-of-way
within urban municipalities when the move is requested by the governing authority
when requested by customers for services under Fortis’ terms and conditions of service
when requested by customers for power lines on public property220



232. Fortis provided a five year history for the capital expenditures for the program along with
an explanation for the variances between actual and forecast, as follows:
Table 16. Distribution Line Moves program capital expenditures221
2010
2011
2012
Forecast
2008
Actual
Forecast
2009
Actual
Forecast Actual
Forecast Actual
Forecast Actual
Capital expenditures
14.8
21.4
15.9
30.2
($ million)
23.1
20.0
21.2
25.3
25.6
27.8
Customer
contributions
Total
(3.5)
(8.3)
(3.8)
(8.2)
(6.5)
(11.3)
(6.9)
(8.3)
(8.8)
(4.9)
11.3
13.1
12.1
22.0
13.5
11.8
14.3
17.0
16.8
22.9
233. For capital expenditures in 2008, the variance was due to increased spending by Alberta
Transportation and a large project involving the burying of lines in downtown Canmore. For
capital expenditures in 2009, an increase of $4.0 million was due to government-initiated road
infrastructure projects. In addition, there were requests to relocate overhead distribution facilities
to underground systems that resulted in a further increase of $3.9 million, while requests to
relocate facilities to accommodate high load moves resulted in an additional increase of
$2.2 million. For 2010, the variance was due to a large line move project requiring the burying of
overhead distribution lines along high load routes, offset by higher customer contributions. In
2011 and 2012, the variances are primarily due to the increased scope and associated costs of the
Highway 63 Twinning project. Fortis explained that the variances in customer contributions were
due to the changes in the proportions of line moves that are customer driven or within urban
areas and require a contribution.
234. Fortis provided the distribution line moves capital expenditures and net capital additions
to rate base associated with this program for 2013 to 2015, as follows:
220
221
Exhibit 22, application, page 13.
Exhibit 22, application, Table 2, page 14.
60 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Table 17. 2013-2015 Distribution Line Moves program net capital additions222
2013
actual
Capital expenditures
Customer contributions
Net capital expenditures
CWIP
Retirements
AFUDC and capitalized overheads
Net capital additions
19.1
(3.3)
15.8
0.4
(2.4)
0.9
14.7
2014
forecast
($ million)
26.2
(7.6)
18.6
(2.2)
(2.4)
0.9
14.9
2015
forecast
27.1
(7.9)
19.2
(1.0)
(2.4)
0.9
16.7
235. Fortis provided its forecasting methodology for this program. Fortis stated that the 2014
and 2015 expenditure forecasts reflect correlations to GDP, municipal funding, and transmission
capital expenditure expectations. The forecast methodology for each category of distribution line
moves was explained by Fortis as follows:
222

For transmission-initiated line moves, Fortis indicated that its actual capital expenditures
correlate closely with those of AltaLink since the number and size of the line moves are
driven by the amount of work that AltaLink undertakes each year. The 2014 and 2015
forecast was calculated based on this correlation between actual Fortis and AltaLink
capital expenditures for 2008 to 2013. Fortis stated that once the correlation between past
actual expenditures is determined, that correlation is applied to AltaLink’s forecast
expenditures for 2014 and 2015 to calculate Fortis’ related line moves expenditures.

For Alberta Transportation initiated lines moves, the 2014 and 2015 forecast was
calculated based on the correlation between actual Fortis and Alberta Transportation
capital expenditures between 2010 and 2013. Fortis stated that once the correlation
between past actual expenditures is determined, that correlation is applied to Alberta
Transportation’s 2014 and 2015 forecast to calculate Fortis’ related distribution line
moves expenditures.

For urban and rural municipal government requests, Fortis stated that it has limited
visibility of future line move projects, and forecasting on a project-by-project basis for a
two-year period is not feasible. Therefore, historical expenditures generally correlate with
municipal transportation grants offered by the Alberta government. These grants are
provided to municipal governments for infrastructure and road improvement projects,
which will often require Fortis line moves. The 2014 and 2015 forecast was calculated
based on the correlation between actual Fortis capital expenditures and Alberta
Transportation municipal grants between 2010 and 2013. Fortis stated that once the
correlation between past actual expenditures and grants was determined, that correlation
is applied to forecast municipal grants for 2014 and 2015 to calculate the related line
moves expenditures. Forecast line move expenditures were segregated into rural and
urban using the five-year average ratio of historical rural and urban expenditures.
Exhibit 63, application, Table 11, page 59.
Decision 3220-D01-2015 (March 5, 2015) • 61
2013-2015 PBR Capital Tracker Application

FortisAlberta Inc.
For customer-initiated line moves, the 2014 and 2015 forecast was calculated based on
the correlation between actual Fortis capital expenditures and GDP for 2008 to 2013 for
these line moves. Fortis stated that once the correlation between past actual expenditures
and GDP is determined, that correlation is used to calculate Fortis’ related line moves
expenditures.223
236. For the forecast customer contributions, Fortis used a five-year ratio of actual
expenditures to actual customer contributions. Once determined, Fortis applies this five-year
ratio to calculate the forecast.
237. Fortis provided the following table outlining the 2013 actual capital expenditures and
contributions and the 2014 and 2015 forecast capital expenditures and contributions, as follows:
Table 18. 2013-2015 Distribution Line Moves program capital expenditures and contributions224
2013 actual
2014 forecast
2015 forecast
($ million)
Gross capital expenditures
19.1
26.2
27.1
Contributions
(3.3)
(7.6)
(7.9)
Net capital expenditures
15.8
18.6
19.2
238. For 2013, Fortis stated that the 2013 forecast cost was $16.2 million and the 2013 actual
costs were $15.8 million, and that the $0.4 million decrease was primarily due to fewer requests
for line moves from Alberta Transportation than had been anticipated.225 For the 2014 forecast,
Fortis included $3.6 million for the Northeast Anthony Henday Drive Project, driven by Alberta
Transportation, and $2.6 million for the Red Deer Transmission project occurring in the
AltaLink service territory. In the hearing, Mr. Eck stated that because Fortis was aware of these
substantial projects, they were added to the 2014 forecast.226
239. Fortis further provided the 2013 actual capital expenditures and 2014 and 2015 forecast
capital expenditures for each distribution line move third-party category, as shown below:
Table 19. 2013-2015 Distribution Line Moves program capital expenditures by third party227
2013 actual
Transmission
Alberta Transportation
Customers
1.8
3.7
6.7
2014 forecast
($ million)
4.7
7.3
6.9
Rural municipal government
Urban municipal government
Total
4.7
2.1
19.1
2.9
4.4
26.2
223
224
225
226
227
Exhibit 22, application, pages 8-12.
Exhibit 22, application, Table 4, page 15.
Exhibit 78.02, AUC-FAI-001.
Transcript, Volume 3, page 400, lines 16-25 (Mr. Eck).
Exhibit 22, application, Table 3, page 15.
62 • Decision 3220-D01-2015 (March 5, 2015)
2015 forecast
3.3
5.0
27.1
4.7
7.0
7.1
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
240. The CCA, in its evidence and in its argument, expressed concerns with the amount of
overhead costs that Fortis allocated to its capital tracker projects or programs. This matter was
dealt with in Section 6 of this decision. In addition, the CCA, in its argument, expressed concerns
with Fortis’ grouping of its capital tracker projects or programs, as discussed in Section 5.
Besides those two concerns that apply to all of Fortis’ capital trackers, the CCA did not take any
specific issue with the Distribution Line Moves program. The UCA also did not express any
concern with this program.
Commission findings
241. Fortis requested capital tracker treatment for the Distribution Line Moves program in the
2013 capital tracker application. At paragraph 1042 of Decision 2013-435, the Commission
indicated that distribution line moves are required on an annual basis to satisfy third-party
requests and franchise agreement obligations for the relocation of distribution lines. However,
without sufficient supporting documentation on the forecast timing, costs and scope of the
program, the Commission found that it could not determine the reasonableness of the proposed
program, and the Commission was unable to undertake a project assessment with respect to the
Distribution Line Moves program. Accordingly, this program did not satisfy the project
assessment requirement of Criterion 1, as determined in paragraph 1043 of Decision 2013-435.
242. The Commission has reviewed the business case provided by Fortis and the evidence on
the record of Proceeding 3220 with respect to Fortis’ Distribution Line Moves program and finds
that the information provided by Fortis supports a finding that Fortis is required to relocate
distribution lines, when requested by each of the five types of third-party categories, namely,
transmission-initiated (AltaLink), Alberta Transportation, urban and rural municipal
governments, and customers, due to present agreements with these external parties. The
Commission notes that the scope, level and timing of this program is driven by external requests.
243. The Commission accepts that Fortis has limited ability to control line move projects if it
is to respond to requests in a timely manner. This makes these costs difficult to forecast.
However, this cost will ultimately be trued up to actual. The most important issue for the
Commission is to satisfy itself that the actual level of costs to move lines is reasonable and
prudent. The Commission has reviewed the reasons for the variances and accepts Fortis’
explanations as reasonable.
244. The Commission finds no evidence on the record of Proceeding 3220 to indicate that the
distribution lines moves were not required in 2013. With respect to the scope, level and timing of
the program carried out in 2013, the Commission has reviewed Fortis’ actual net capital
expenditures of $15.8 million in 2013 associated with this program and finds that they are
generally consistent with the scope, level and timing of the work outlined in the business case for
this capital tracker program. The Commission has also reviewed the costs of the actual capital
additions for this capital tracker program in light of the evidence supporting these costs and finds
the actual costs to be prudent.
245. As set out in Section 3, where a forecasted program or project is part of a multi-year,
ongoing program, or if the program is of an annual, recurring nature, that has previously been
approved for capital tracker treatment, in the absence of evidence that the on-going or recurring
program is no longer required, the Commission will not undertake a reassessment of need under
Criterion 1. The Commission finds no evidence on the record of Proceeding 3220 to indicate that
the Distribution Lines Moves program is not required to continue in 2014 or 2015. The
Decision 3220-D01-2015 (March 5, 2015) • 63
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Commission has reviewed Fortis’ business case, where it demonstrated that its forecasting
methodology for the 2014 and 2015 expenditure forecasts reflected correlations to GDP,
municipal funding, and transmission capital expenditure expectations. Based upon its review of
the forecast methodology, the business case and other relevant portions of the record for this
program, the Commission finds the scope, level and timing of this program for 2014 and 2015 to
be reasonable.
246. For the Distribution Line Moves program, the actual capital additions of $14.7 million
are approved for 2013. The forecast capital additions of $14.9 million for 2014 and $16.7 million
for 2015 are approved. Given the above, the Commission finds that this program satisfies the
project assessment requirement of Criterion 1.
7.2.5
Urgent Repairs program
247. Fortis explained that its Urgent Repairs program is required to maintain or restore service
after a distribution plant has experienced a failure, has been identified as failing, or poses a safety
hazard to employees or the public. This program includes the immediate removal and
replacement of system components that have failed, or that face impending failure. Fortis
provided an overview of this program in its application and provided additional details and
analysis in Appendix A-5.
248. Fortis is applying for capital tracker treatment for this program in 2013 on an actual
expenditures basis and in 2014 and 2015 on a forecast expenditures basis. The actual capital
expenditures for 2013 were $15.9 million with net capital additions of $13.3 million. Total
capital expenditures are forecast at $15.5 million in 2014 and $16.1 million in 2015 with net
capital additions of $13.0 million in 2014 and $13.7 million in 2015.
249. Fortis submitted that this program is necessary to meet its statutory obligation under
sections 105 and 127 of the Electric Utilities Act, which states that Fortis, as a distribution
system operator, “is obligated to operate and maintain its system in a safe and reliable manner,
and to provide and maintain service that is safe, adequate, and proper.”
250. Since 2012, Fortis has tracked the expenditures in this program by two major categories
which are as follows:


Property Retirements Units (PRU), which represent complete equipment units, such as
transformers, poles, and switching structures.
Specific Replacements, which represent the replacement of specific components, such as
individual switch units, lightning arrestors, and ground rods.
64 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
251. Fortis provided a comparison of both unit and total costs for PRUs and specific
replacements between the years 2012 and 2013, which is illustrated in the table below:
Table 20. Urgent Repairs program – units and expenditures228
2012
2013
Property Retirement Units (volume)
3,762
3,271
Specific Replacements (volume)
4,374
2,614
PRU expenditures ($ million)
12.5
13.5
Specific Replacement expenditures ($ million)
2.9
2.4
252. In AUC-FAI-005, based upon the information provided in Table 20, the Commission
derived the unit costs for each of the two activities, which are shown in the table below. The
Commission inquired why, despite having a lower volume of replacements for both PRUs and
specific replacement in 2013, the unit costs were significantly higher for each.
Table 21.
Cost per unit of replacement229
2012
2013
($)
Property Retirement Units
Specific Replacement
253.
3,322.7
663
4,127
918
Fortis explained:
… FortisAlberta has over 20 PRU types with varying unit costs, such as streetlight
luminaires, single-phase overhead transformers, and voltage regulators.
Depending on the quantity and mix of PRUs, the combined PRU unit cost varies. As an
example, FortisAlberta replaced 34 underground three-phase switches in 2013 compared
to 16 in 2012. Meanwhile, 1,093 streetlight luminaires were replaced in 2013 compared
to 1,228 in 2012. As the unit cost for underground three-phase switches are substantially
greater than streetlight luminaires, the overall PRU unit cost would be higher in 2013.
Another contributing factor to the higher unit cost in 2013 for PRUs and specific
replacement activities was the high cost of repairs relating to the June 2013 floods. Many
repairs required crews to work long hours in difficult conditions in order to restore power
to customers. Temporary repairs were required in many locations due to environmental
conditions, long-term approvals, erosion of riverbanks, and changes in river courses. In
some cases, services had to be fed from a different source given these constraints.
254. Fortis’ forecast capital expenditures are based upon a three-year average of historical
actual annual costs, adjusted for inflation using the Alberta CPI. The 2014 forecast is the average
of capital expenditures for the period 2011 to 2013, escalated by the CPI. Similarly, the 2015
forecast represents the average expenditures for the period 2012 to 2014, escalated by the CPI.
The table below provides the forecasts for 2014 and 2015 and the actual capital expenditures for
2011 to 2013 upon which the forecasts are based.
228
229
Exhibit 28, application, Appendix A -5, page 6 of 8, Table 2.
Exhibit 78.02, AUC-FAI-005.
Decision 3220-D01-2015 (March 5, 2015) • 65
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Table 22. Urgent Repairs program capital expenditures summary
2011
actual
Total
13.9
2012
actual
15.3
2013
actual
($ million)
15.9
2014
forecast
15.5
2015
forecast
16.1
255. Fortis noted that due to the unpredictable nature of urgent repairs, expenditures can vary
considerably from year to year. Because of this variability in expenditures, in AUC-FAI-005, the
Commission asked Fortis to comment on whether using a longer time span than three years in
calculating the historical annual costs would produce better forecasts. In its response,230 Fortis
calculated historical averages for different timeframes, ranging from three to 10 years, to
determine the urgent repairs forecast for the subsequent year. The annual expenditures were then
escalated to 2013 dollars. The results indicated that using the three-year average provided more
reasonable forecasting results than using longer timeframes as the difference between actual and
forecast was the smallest for forecasts based on three-year averages.
256. The UCA did not raise any issues with the Urgent Repairs program in its evidence and
argument. The CCA, in its evidence and in its argument, expressed concerns with the amount of
overhead costs that Fortis allocated to its capital tracker projects or programs. This matter was
dealt with in Section 7.1.2 of this decision. In addition, the CCA, in its argument, expressed
concerns with Fortis’ grouping of its capital tracker projects or programs, as discussed in
Section 5. Besides those two concerns that apply to all of Fortis’ capital trackers, the CCA did
not take any other issue with the Urgent Repairs program.
Commission findings
257. Fortis requested capital tracker treatment for the Urgent Repairs program based on the
actual capital additions in 2013 and based on forecast capital additions in 2014 and 2015. This
program was previously approved by the Commission in Decision 2008-011, 231 Decision 2010309 232 and Decision 2012-108,233 dealing with Fortis’ past tariff applications.
258. The Commission finds no evidence on the record of Proceeding 3220 to indicate that the
Urgent Repairs program was not required in 2013. The Commission has reviewed the business
case provided by Fortis and the evidence on the record of this proceeding with respect to the
Urgent Repairs program and finds that the information provided by Fortis supports a finding that
the program was required to maintain service reliability and safety at adequate levels during
2013, to maintain or restore service after a distribution plant has experienced a failure, has been
identified as failing, or poses a safety hazard to employees or the public.
259. With respect to Fortis’ request for capital tracker treatment for 2013 based on 2013 actual
capital additions, the Commission has reviewed the scope, level, and timing of the Urgent
Repairs program carried out in 2013 and the 2013 actual capital additions of $13.3 million. The
230
231
232
233
Exhibit 78.09, AUC-FAI-005, Attachment 1.
Decision 2008-011: FortisAlberta Inc., 2008/2009 Phase I Distribution Tariff and Negotiated Settlement
Agreement, Proceeding 1, Application 1514140, February 12, 2008.
Decision 2010-309: FortisAlberta Inc., 2010-2011 Distribution Tariff – Phase I, Proceeding 212,
Application 1605170, July 6, 2010.
Decision 2012-108: FortisAlberta Inc., Application for Approval of a Negotiated Settlement Agreement in
respect of 2012 Phase I Distribution Tariff Application, Proceeding 1147, Application 1607159, April 18, 2012.
66 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Commission has reviewed the costs of the actual capital additions for this proposed capital
tracker program in light of the information presented in the business case and in AUC-FAI-005
and the associated procurement and construction practices. The Commission finds the actual
costs for this program in 2013 to be prudent.
260. Fortis also requested capital tracker treatment for this program in 2014 and 2015. The
Commission finds no evidence on the record of Proceeding 3220 to indicate that the Urgent
Repairs program is not required to continue in 2014 or in 2015. With respect to the scope, level,
and timing of this program for 2014 and 2015, the Commission has reviewed the business case
and the relevant portions of the record for this program and finds the forecast scope, level and
timing of the program for 2014 and 2015 to be reasonable.
261. The forecast capital additions associated with this program are $13.0 million in 2014 and
$13.7 million in 2015. The Commission has reviewed Fortis’ response to AUC-FAI-005, where
it demonstrated that its forecasting methodology of using the historical average of the last three
years yields forecasts with the smallest variance from the actuals, and found the calculations
illustrative in demonstrating the reasonableness of its forecasts. Based upon its review of the
calculations, the business case and other relevant portions of the record for this program, the
Commission finds the total annual forecast for 2014 and 2015 to be reasonable.
262. Given the above, the Commission finds that the information provided by Fortis supports a
finding that the scope, level, timing and forecast costs for the Urgent Repairs program are
reasonable as proposed for 2013-2015. Accordingly, the Commission finds that this program
satisfies the project assessment requirement of Criterion 1.
7.2.6
Distribution Capacity Increases program
263. The Distribution Capacity Increases program is driven by the company’s obligation to
provide reliable service to customers. This program is composed of two categories: Capacity
Increases and System Improvements. Fortis provided an overview of this program in its
application and provided additional details and analysis in Appendix A-6, which bore an
engineer’s stamp. Attachments to Appendix A-6 included four attachments providing details of
the forecasts for projects from 2009 through 2012.
264. Fortis is not applying for capital tracker treatment for this program for 2013 but is
applying for such treatment in 2014 and 2015. Total capital expenditures are forecast at
$20.5 million in 2014 and $14.8 million in 2015 with net capital additions of $17.8 million in
2014 and $12.5 million in 2015.
265. Capacity Increases are required to address potential problems caused by load growth,
such as low voltage and thermal overload, and to prevent adverse reliability and power quality
impacts for existing customers. Individual projects will increase the capacity of distribution
feeders in areas where forecast load growth will violate planning standards and create overloaded
distribution system components.
266. System Improvements are also required to address potential problems associated with
load growth involving upgrades to distribution components or installing new components in
order to maintain service reliability and power quality for customers. System Improvements are
Decision 3220-D01-2015 (March 5, 2015) • 67
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
composed of two categories: System Reliability and System Neutral.234 System reliability allows
Fortis to feed load from an alternate substation, when and if required. This is provided for most
customers but is not provided for all rural customers. The System Neutral project involves
installation of a “neutral” wire and is explained further below.
267. Fortis uses current peak data and growth expectations to forecast the peaks on each of its
approximately 570 distribution feeders. It then models various strategies to deal with any
forecast over-load conditions including load transfer, voltage regulators, capacitors, reconductoring and adding new feeders.235
268. The capital expenditures required for 2014 and 2015, respectively, are based on the
specific solutions to correct identified distribution capacity problems, and individual projects to
upgrade protection schemes or replace transformers due to unanticipated load growth.236
269.
The following table shows the total capital expenditures and capital additions.
Table 23. Distribution Capacity Increases program net capital additions237
2014
forecast
2015
forecast
($ million)
Capital expenditures
20.5
14.8
CWIP
(1.2)
(0.5)
Retirements
(2.2)
(2.3)
AFUDC and capitalized overheads
0.7
0.5
17.8
12.5
Net capital additions
270. Capacity increases and system improvements are driven by the need to maintain certain
operational planning standards. Fortis indicated that its planning standards include:
234
235
236
237
238
•
operation of overhead and underground cables so that maximum loading is less than
the ampacity, or current carrying capacity rating of the equipment;
•
operation of transformers and voltage regulators so that maximum loading is less
than 100% of nameplate rating;
•
customer voltage levels that are consistent with the Canadian Standards Association
C235 standard; and
•
short circuit levels that are in a range to allow for safe operation of the electrical
system.238
Exhibit 63, paragraphs 220-222.
Exhibit 63, paragraphs 223-224.
Exhibit 63, paragraphs 223-224.
Exhibit 63, application, Table 15, paragraph 226.
Exhibit 29, Section 2.1.1.
68 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
271.
FortisAlberta Inc.
Fortis described the System Neutrals project as follows:
For the past 70 years, the distribution utilities in the prairie provinces of Alberta,
Saskatchewan, and Manitoba have installed three-wire systems. This means that in rural
areas, the utilities have used the earth as the ground return path instead of a multigrounded neutral (MGN). In urban areas, both large and small, an MGN has been
installed. However, the MGN has not been interconnected with the substation neutral.
…
In 2008, FortisAlberta started a multi-year System Neutral program to install neutrals on
sections of the overhead distribution system.
…
In a three-wire system, the lack of a neutral can impact the amount of noise in telephone
cables. The noise gets worse with the accumulation of variable frequency drives (VFDs)
and other harmonic-producing loads. This increasing telephone noise creates customer
service problems for the telecommunications industry. In the FortisAlberta service area,
TELUS Communications has requested neutral installations as a condition of their
approval of FortisAlberta construction plans, which is required under the Water, Gas and
Electric Companies Act.
…
In addition to the issue with telecommunications issue, the three-wire system is less
reliable than the four-wire system because of the risk of equipment failure. The four-wire
system has a lower ground potential rise (GPR) during fault conditions. The higher GPR
of the three-wire system increases the risk of equipment failure. Specifically,
FortisAlberta has experienced lightning arrestor failure due to higher GPR during fault
conditions.239
272.
Fortis described its line losses project, which is a component of this program, as follows:
On an annual basis, FortisAlberta reviews all distribution system feeders, documents the
losses on each feeder, identifies potential line loss reduction solutions, and implements
the most cost effective solutions.240
273.
The costs of this program, broken out by the two major categories, are as follows:
Table 24. Distribution Capacity Increases program capital expenditures241
2014
forecast
2015
forecast
($ million)
Capacity Increases
System Improvements
10.5
10.0
5.4
9.4
Total
20.5
14.8
239
240
241
Exhibit 29, pages 5-6.
Exhibit 29, page 7.
Exhibit 29, Table 1.
Decision 3220-D01-2015 (March 5, 2015) • 69
2013-2015 PBR Capital Tracker Application
274.
FortisAlberta Inc.
Fortis provided a summary of historical forecast and actual expenditures for this program.
Table 25. Distribution Capacity Increases program capital expenditures
2009
Forecast
Actual
Capacity
Increases
System
Improvements
Total
275.
2010
Forecast
Actual
2011
Forecast
Actual
($ million)
2012
Forecast
Actual
9.0
8.9
7.7
8.8
5.3
5.3
7.5
9.1
4.5
3.1
4.7
3.9
4.9
3.8
4.3
7.4
4.7
3.6
12.1
13.6
11.6
13.7
9.1
9.6
14.9
13.8
8.1
Variance explanations were provided for the years 2009 through 2012.
Table 26. Distribution Capacity Increases program capital expenditure variances and explanations
Year
Overspent
2009
12%
2010
18%
2011
5%
2012
(7%)
2013
(46%)242
Explanation
Variance explanations were provided by individual project (of which there were many) in Appendix A6, attachments 3 and 4. There was a variety of reasons for variances including design changes,
projects carried over to the next year, cancelations, projects advanced from future years, due to load
growth and changes in plans by municipalities.
Mostly due to discretionary deferrals in 2013.
276. Fortis sharply curtailed its spending in 2013 as compared to 2012. Fortis explained that
system improvements could be deferred but not capacity increases.243 The deferral of the system
improvements component of this program is dealt with in Section 6 of this decision.
277. At the hearing, there was extensive discussion about Fortis’ proactive approach to
maintaining target voltage levels at certain points on its system in order to avoid letting the
voltage get too low at the customer’s premises. Fortis explained the rationale for its voltage
standards. The rationale included keeping voltage at levels required by standards after allowing
for an additional voltage drop on the secondary conductor.244 Fortis was questioned about the
possibility of allowing transformers to exceed the nameplate rating and its ability to add cooling
to existing transformers to increase capacity and what effect these may have on capital costs.
Fortis explained that running transformers above their nameplate rating, for longer than short
periods of time, would reduce their lives and that adding cooling to existing transformers would
not be cost effective and that it would require a secondary power source and an additional
transformer to be added.245
278. In his evidence, Mr. Shymanski on behalf of the UCA recommended that Fortis’ projects
deferred from 2013 to 2014-2015, including the capacity increases program, not be afforded
capital tracker treatment; and any capital additions effect of the deferral be removed from the
242
243
244
245
2013
Actual
Exhibit 78.02, AUC-FAI-020 (a) indicates that there was, approximately, a $7 million deferral, while Table 25
above indicates that the actual expenditure was 8.1 million, which indicates that the actual was approximately
46 per cent less than forecast.
Exhibit 29, page 10, Section 3.5.
Transcript, Volume 4, pages 570-580 (Mr. Bahry and Mr. Eck).
Transcript, Volume 4, pages 580-595 (Mr. Bahry and Mr. Eck).
70 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
2014 K factor calculation.246 This recommendation was addressed in Section 6 of this decision.
Mr. Shymanski did not take any other issue with this program.
279. The CCA, in its evidence and in its argument, expressed concerns with the amount of
overhead costs that Fortis allocated to its capital tracker projects or programs. This matter was
dealt with in Section 7.1.2 of this decision. In addition, the CCA, in its argument, expressed
concerns with Fortis’ grouping of its capital tracker projects or programs, as discussed in
Section 5. Besides those two concerns that apply to all of Fortis’ capital trackers, the CCA did
not have any specific reduction recommendations for this program.
Commission findings
280. For this program, the need, scope, level and timing are determined by Fortis based on
engineering studies. These costs will ultimately be trued up to actual. It is important for the
Commission to satisfy itself that the need, scope, level and timing are all prudent and that the
actual costs are reasonable and prudent.
281. No instances of imprudent spending in 2013 were identified on the record of this
proceeding.
282. With respect to the variance to forecast in 2013 and prior years, the Commission notes
that the variance in 2013 was due to the deferral of projects that is dealt with in Section 6 of this
decision. Variances in prior years were explained as noted above.
283. The Commission has reviewed the business case and engineering study provided by
Fortis in Appendix A-6 and the evidence on the record of this proceeding with respect to this
program and finds that the information provided by Fortis supports a finding that the program
was required previously and will continue to be required during the 2014-2015 forecast period to
maintain service reliability and safety at adequate levels.
284. With respect to the scope, level and timing of this program carried out in 2013, the
Commission has reviewed Fortis’ capital expenditures associated with this project and finds that
they are generally consistent with the scope, level and timing of the work outlined in the business
case for this capital tracker. The Commission has also reviewed the costs of the actual capital
additions for this program in light of the evidence supporting these costs, the associated
procurement and construction practices and the evidence explaining the differences between
approved forecast and actual costs, and finds the actual costs to be prudent. The Commission
recognises that this is not a capital tracker for 2013 but also recognises that the expenditures in
2013 affect the revenue requirement in future years.
285. Fortis requested capital tracker treatment for this program in 2014 and in 2015. Where a
forecasted program or project is part of a multi-year, ongoing program or project, or if the
program or project is of an annual recurring nature, that has previously been approved for capital
tracker treatment, in the absence of evidence that the on-going or recurring project or program is
no longer required, the Commission will not undertake a reassessment of need under Criterion 1.
The Commission finds no evidence on the record of this proceeding to indicate that this program
is not required to continue in 2014 or 2015.
246
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 12-15.
Decision 3220-D01-2015 (March 5, 2015) • 71
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FortisAlberta Inc.
286. With respect to the scope, level and timing of this program for 2014 and 2015, the
Commission has reviewed the business case and the relevant portions of record for this program
and finds the forecast scope, level and timing of the program for 2014 and 2015 to be prudent.
Fortis’ forecast capital additions associated with this program are $2.4 million in 2014 and
$2.5 million in 2015. The Commission has reviewed the information supporting Fortis’ forecasts
and finds the total annual cost forecast to be reasonable.
287. The forecast capital additions of $17.8 for 2014 and $12.5 million for 2015 are approved.
Given the above, the Commission finds that the information provided by Fortis supports a
finding that the scope, level, timing and forecast costs for this program are reasonable as
proposed for 2014-2015. Accordingly, the Commission finds that the Distribution Capacity
Increases program satisfies Criterion 1, in regards to need, scope, timing and cost on a forecast
basis for 2014 and 2015.
7.2.7
Worst Performing Feeders program
288. The Worst Performing Feeders program focuses on the repair and upgrade of those
sections of feeders on Fortis’ distribution system that have the poorest reliability. Fortis provided
details of this program in Appendix A-7 of the application.
289. Fortis is not applying for capital tracker treatment for this program in 2013 but is
applying for capital tracker treatment in 2014 and 2015. Total capital expenditures are forecast at
$6.1 million in each of 2014 and 2015 with net capital additions of $5.5 million in 2014 and
$5.7 million in 2015.
290. As Fortis explained, this program screens feeders according to the number of outages, the
duration of those outages, and the corresponding number of customers affected. The main causes
of the outages are identified and analyzed, and subsequently, repairs or upgrades are completed.
The specific work can involve the rebuild of entire sections of a feeder, but typically involves
upgrades to individual components of the distribution system, such as switches, insulators or
conductors. The process can be summarized as follows:247
a. identifying the worst performing areas of the distribution system and determining the
causes of poor performance
b. developing and implementing an action plan to address the causes
c. measuring and assessing the effectiveness of the improvements
291. Regarding the need for the Worst Performing Feeders program, Fortis pointed out that if
it does not proceed with this program, it would not be in compliance with the Rule 002.248
Specifically, Fortis referenced Section 4.4.3(1) of the Rule 002 that states:
Owners must identify, for each calendar year, the worst-performing circuits on its
systems. Worst-performing circuits shall be determined by comparing annual unplanned
SAIDI [system average interruption duration index] results for each of its circuits. The
three per cent of the circuits with the highest SAIDI values shall be considered the worstperforming circuits and shall be reported in the Rule 002 annual report. Owners must
identify the factors underlying the poor performance of these circuits and describe the
247
248
Exhibit 36, Appendix A-7, page 1.
Rule 002: Service Quality and Reliability Performance Monitoring and Reporting for Owners of Electric
Distribution Systems and for Gas Distributors.
72 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
actions that are being considered or have been implemented to improve the reliability of
these circuits as part of the Rule 002 annual report.249
292. Additionally, Fortis noted that under Section 105(1) of the Electric Utilities Act, it is
required to upgrade and improve its electric distribution system to provide safe, reliable and
economic delivery of electric energy to its customers. According to Fortis, not proceeding with
the Worst Performing Feeders program would result in the impairment of service quality to
customers.
293. Fortis explained that since 2000, it has undertaken a Worst Performing Feeders program
to improve the reliability of feeders where sustained and momentary outages are the highest
within its service territory. In 2011, Fortis made a decision to expand the scope of this program
to address reliability issues beyond the bottom three per cent of worst performing feeders
prescribed in Rule 002.250 Fortis indicated that this change in approach was approved in Decision
2012-108, dealing with its 2012 DTA NSA. In that DTA, Fortis provided the following
explanation on its decision to expand the Worst Performing Feeders program:
In 2011 FortisAlberta modified its approach to the worst performing feeders initiative
from one that viewed reliability performance predominantly from the system perspective
to one that viewed reliability performance predominantly from the customer's
perspective.
The initiative was modified to ensure that the 3 percent of customers who have
experienced the worst reliability in the previous year are addressed…251
294. As a result, currently Fortis’ Worst Performing Feeders program, as proposed for capital
tracker treatment in 2014 and 2015, comprises three elements:
a. the bottom three per cent of feeders with the worst reliability performance
b. line sections downstream of trouble switches (protective devices) with multiple or
sustained outages
c. sections of feeders with 50 or more customers experiencing six or more outages over a
12-month period252
295. According to Fortis, viewing outage drivers from a combination of these three
perspectives provides optimal solutions for improving reliability. Fortis also stated that
addressing reliability performance in this manner addresses both the Rule 002 requirements and
improvements to overall system reliability. Table 27 shows forecast capital expenditures and
capital additions associated with this program in 2014 and 2015.
249
250
251
252
Section 4.4.3(1) of Rule 002.
Exhibit 36, Appendix A-7, page 12 and Transcript, Volume 4, page 609.
Proceeding 1147, Exhibit 2, paragraphs 482-483.
Exhibit 36, Appendix A-7, page 3.
Decision 3220-D01-2015 (March 5, 2015) • 73
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Table 27. Capital expenditures and capital additions associated with the Worst Performing Feeders
program
2014
forecast
2015
forecast
($ million)
Worst Performing Feeders
Trouble Switches
Customers Experiencing Multiple Outages
Total capital expenditures
CWIP
Retirements
AFUDC and indirect capitalized overhead costs
Net capital additions
3.0
1.3
1.8
6.1
(0.3)
(0.5)
0.2
5.5
3.0
1.3
1.8
6.1
(0.2)
(0.5)
0.2
5.7
296. Fortis did not request capital tracker treatment for this program in 2013. Fortis indicated
that in 2013, it decided to defer the portion of capital expenditures associated with trouble
switches and high customer outage areas due to “the uncertainty as to the nature and extent of
capital tracker treatment.” The program expenditures associated with the bottom three per cent of
worst performing feeders were not deferred but did not qualify for capital tracker treatment.
According to Fortis, this was only a short-term measure, and the trouble switches and high
customer outage areas of the Worst Performing Feeders program, originally scheduled for 2013,
have been deferred to 2014 and 2015.
297. Regarding the forecasting method for the feeders component of this program, Fortis
indicated that 12 months of outage information for all feeders is compiled annually to identify
the worst performing feeders, trouble switches and locations of customers with multiple outages.
These lists are assessed by field personnel to confirm that repairs to the distribution system are
necessary and appropriate to mitigate reliability concerns. Specifically, Fortis reviews the
following reliability data to prioritize feeders from worst to best:253
a. customer-hours of interruption
b. number of outages
c. SAIDI, system average interruption frequency index (SAIFI), and protection equipment
counter readings
d. circuit criticality
e. number of customers served by the feeder
298. In categorizing the data, Fortis arranges outage maps for the 30 worst performing
distribution feeders that highlight locations of reported outages and the respective causes. During
the hearing, Mr. Eck explained that 30 worst performing feeders represent the initial sample
(selected based on the criteria outlined above), which is later narrowed to the three percent of the
worst performing feeders, which would be 18 in 2013 and 19 in 2014.254 Line patrol records
assist in identifying problems and solutions. This review determines the bottom three per cent of
the worst performing distribution feeders in Fortis’ service territory. Once the causes of
reliability issues are determined, an implementation plan is executed.
253
254
Exhibit 36, Appendix A-7, pages 10-11.
Transcript, Volume 4, page 604, lines 14-20 and page 606, lines 1-6 (Mr. Eck).
74 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
299. To forecast the trouble switches component of this program, Fortis indicated that trouble
switches activated more than three times in a year due to unplanned power outages are identified
and analyzed for reliability improvement. This analysis includes areas that may not be a part of
the bottom three per cent of worst performing feeders. Outage statistics are mapped to common
upstream trouble switches to identify specific reliability issues. The resulting sections of feeders
are repaired as part of the Worst Performing Feeders program. In response to an undertaking to
the Commission, Fortis explained that its decision to address trouble switches activated more
than three times in a year was established based on customer feedback accumulated over time.
Specifically, Fortis has identified that customers generally contact the company with concerns of
reliability of service after they have experienced a third outage.255
300. As part of this program, Fortis also identifies areas where circuits of 50 or more
customers experienced six or more outages in the preceding year. The data is mapped showing
outage counts and density of customers with multiple outages. Outage causes are reviewed and
the required repairs are completed to address the reliability issues. During the hearing, Fortis
explained that its determination that circuits of 50 or more customers that experienced six or
more outages in a year should be addressed under this program was based on budgeting and
resources considerations:
… How did Fortis determine that 50 or more customers with six or more outages was the
appropriate benchmark?
A. MR. ECK: In 2011, as I mentioned earlier, we reviewed a number of customers that
were impacted using the first two criteria, the worst performing feeders as well as trouble
switches. Based on that assessment we recognized that there was a significant number of
customers experiencing multiple outages that fit within those categories. I think at that
time it was about 12,000 customers.
We looked at our statistics and we looked at customers being impacted at, let's say, five
or more outages, six or more outages and so forth, and given the resources we have, we
felt that customers experiencing six or more outages was a reasonable level for us to be
able to manage customers that experienced that level of outage.256
301. Fortis indicated that the 2014 forecast is based on repairs and upgrades to improve
reliability on 19 worst performing feeders, 144 trouble switches and 41 circuits where customers
have experienced six or more outages in the prior year. Fortis provided the list of feeders and line
sections to be addressed under this program in 2014 in Appendix A-7, Attachment 2.257
302. Regarding the 2015 forecast, Fortis stated that it will identify the specific, worst
performing circuits to be addressed in 2015 as part of the Worst Performing Feeders program in
early 2015. Therefore, Fortis’ 2015 capital expenditures forecast for this program is equal to the
2014 number of $6.1 million, as shown in Table 27. Fortis noted that the list of feeders and line
sections for 2015 will be prepared in early 2015.
303. Regarding the reasonableness of the program costs, Fortis indicated that its Distribution
Design and Construction Standards, Service and Metering Guide, and Customer Terms and
Conditions serve as the foundation for the Company’s provision of safe, reliable service at
reasonable cost. Fortis also stated that in addition to the cost minimization methods used in
completing all programs and projects (as discussed in Section 7.1.1 of this decision), it employs
255
256
257
Exhibit 124.02.
Transcript, Volume 4, page 622, lines 6-22 (Mr. Eck).
Exhibit 38, Appendix A-7, Attachment 2.
Decision 3220-D01-2015 (March 5, 2015) • 75
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FortisAlberta Inc.
some additional methods to minimize the level of capital expenditures for this program,
including:
a. Detailed feeder analysis prior to construction to ensure the most feasible solution is
selected for long-term feeder reliability and coordination with other activities.
b. Coordination of reliability improvements to facilities to optimize asset life and minimize
resource requirements.258
304. In his evidence, Mr. Shymanski on behalf of the UCA, recommended that Fortis’ projects
deferred from 2013 to 2014-2015, including the Worst Performing Feeders program, not be
afforded capital tracker treatment; and that the capital additions impact of the deferral be
removed from the 2014 K factor calculation.259 This recommendation was addressed in Section 6
of this decision. Mr. Shymanski did not take any other issue with this program.
305. The CCA, in its evidence and in its argument, expressed concerns with the amount of
overhead costs that Fortis allocated to its capital tracker projects or programs. This matter was
dealt with in Section 7.1.2 of this decision. In addition, the CCA, in its argument, expressed
concerns with Fortis’ grouping of its capital tracker projects or programs, as discussed in
Section 5. Besides those two concerns that apply to all of Fortis’ capital trackers, the CCA did
not take any other issue with the Worst Performing Feeders program.
Commission findings
306. Fortis requested capital tracker treatment for the Worst Performing Feeders program
based on forecast capital additions in 2014 and 2015. Fortis did not request capital tracker
treatment for this program in 2013. Fortis indicated that in 2013, it decided to defer the portion
of capital expenditures associated with trouble switches and high customer outage areas due to
“the uncertainty as to the nature and extent of capital tracker treatment.”260 The program was
previously approved by the Commission in Decision 2008-011, Decision 2010-309 and
Decision 2012-108, dealing with Fortis’ past tariff applications.
307. In Section 6, the Commission determined it will not disqualify from capital tracker
treatment the five 2013 capital tracker projects or programs delayed, in whole or in part, because
of the “uncertainty as to the nature and extent of capital tracker treatment.”
308. With respect to the scope, level, and timing of the Worst Performing Feeders program for
2014 and 2015, Fortis explained that this program comprises three elements:
a. the bottom three per cent of feeders with the worst reliability performance
b. line sections downstream of trouble switches (protective devices) with multiple or
sustained outages
c. sections of feeders with 50 or more customers experiencing six or more outages over a
12-month period261
309. Fortis confirmed that of the three elements of this program, only the bottom three per cent
of feeders with the worst reliability performance is required under Rule 002.262 The other two
258
259
260
261
Exhibit 36, Appendix A-7, page 14.
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 12-15.
Exhibit 36, Appendix A-7, page 12.
Exhibit 36, Appendix A-7, page 3.
76 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
elements were introduced by Fortis in 2011 to accommodate a change in approach to the Worst
Performing Feeders program from one that viewed reliability performance predominantly from
the system perspective to one that viewed reliability performance predominantly from the
customer’s perspective. In effect, the program was modified to ensure that the three per cent of
customers who have experienced the worst reliability in the previous year have their issues
addressed, rather than focusing on just the three per cent worst performing feeders, as required
under Rule 002.263 Mr. Eck commented on this approach further in the oral hearing in an
exchange with Commission counsel:
Q. So what would happen if Fortis just limited its activity in this program to focusing
only on the worst performing feeders as prescribed by Rule 2?
A. MR. ECK: We believe that service quality will degrade. If you have areas where
customers are experiencing eight outages, we don't feel, from our perspective, that that's
appropriate. So there will be a deterioration in service quality.
Q. Isn't it the case, though, that if Fortis just replaces the bottom 3 percent of worst
performing feeders, the concerns of customers experiencing the worst reliability would
still be addressed but maybe not as quickly as under the current expanded program?
A. MR. ECK: Not really. When we look at just the -- when we look at the worst
performing feeders at the feeder level, many of those situations won't address certain
pockets of customers, and that was the reason we introduced the customer experiencing
multiple outages category within this program. So certain levels of customers will be
impacted by just looking at the 3 percent of worst performing feeders.264
310. However, as noted earlier in this section, when faced with the “uncertainty as to the
nature and extent of capital tracker treatment” in 2013, Fortis decided to defer most of capital
expenditures associated with trouble switches and high customer outage areas due to “the
uncertainty as to the nature and extent of capital tracker treatment.” The program expenditures
associated with the bottom three per cent of worst performing feeders were not deferred.265
During the hearing, Fortis indicated that it made this decision because the worst performing
feeders component had the greatest effect on customers:
Q. And can you explain to me why Fortis made the decision to only proceed with the
expenditures associated with the bottom 3 percent of worst performing feeders but
deferred the trouble switches and high customer outage area components of this program?
A. MR. ECK: When we assessed the situation, we looked at the number of customers
affected. We felt that the worst performing feeders, there was more impact on our
customers. We did complete some of the trouble switches and the customers experiencing
multiple outages in 2013. And, again, based on the -- depending on the volume of
customers affected, so for example, if you had areas where you had, let's say, 300 to 400
customers experiencing seven or more outages, we would address those or we would
have addressed those in 2013.
262
263
264
265
Transcript, Volume 4, page 607, line 22 to page 608, line 2 (Mr. Eck).
Proceeding 1147, Exhibit 2, paragraphs 482-483.
Transcript, Volume 4, page 627 line 17 to page 628, line 13 (Mr. Eck).
Exhibit 36, Appendix A-7, page 12.
Decision 3220-D01-2015 (March 5, 2015) • 77
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FortisAlberta Inc.
Q. Did the fact that you needed to require with AUC Rule 2 have any -- was that a factor
in you deciding not to defer the 3 percent of worst performing feeders component?
A. MR. ECK: That was a part of the requirement. The main -- or our decision was more
based on looking from the impact on customers. When we looked at the -- when we
analyzed all the circuits, we would have chosen ones where customers had the most
benefit.266
311. The Commission observes that, in supporting the need for this program, Fortis referred to
Section 4.4.3(1) of Rule 002, referenced earlier in this section. However, as set out earlier in this
section, Fortis agreed that Rule 002 requires a company to repair only the three per cent of
circuits with the highest SAIDI values.267 The Commission also considered the fact that Fortis
was able to defer most of the capital expenditures associated with trouble switches and high
customer outage areas in 2013, and Fortis’ evidence that not proceeding with the worst
performing feeders element of the Worst Performing Feeders would have had the greatest effect
on customer service quality and reliability in 2013.
312. The Commission has also considered that the scope of the Worst Performing Feeders
program comprising all three elements was approved in Decision 2012-108, dealing with its
2012 DTA NSA. However, Fortis acknowledged that typically, NSAs involve a number of tradeoffs and represent an agreement between the company and its customers in place for a certain
period of time. Fortis also agreed that although the Commission approved this change as part of a
negotiated settlement, it does not constitute Commission policy that would supplant Rule 002
requirements.268
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 002.269
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.
314. However, as set out at paragraph 615 of Decision 2012-237, a company may choose to
undertake a capital investment prior to applying for capital tracker treatment in a subsequent
annual capital tracker filing. In other words, a company does not have to wait for the
Commission’s approval of its forecast for capital tracker treatment to proceed with projects
required to maintain service reliability and safety at adequate levels. Consistent with these
findings, Fortis may apply for the inclusion of the trouble switches and high customer outage
components as part of the Worst Performing Feeders program on an actual basis at the time of
the 2014 and 2015 capital tracker true-up applications if Fortis can justify the inclusion of these
two components in the Worst Performing Feeders capital tracker program for reasons other than
266
267
268
269
Transcript, Volume 4, page 625 line 14 to page 626, line 14 (Mr. Eck).
Transcript, Volume 4, page 607 line 22 to page 608, line 2 (Mr. Eck).
Transcript, Volume 4, page 697 line 2 to page 698, line 5 (Mr. Eck).
Section 4.4.3(1) of Rule 002.
78 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Rule 002 requirements. For example, Fortis may present evidence that the number of customer
complaints received by Fortis, or the actual duration of sustained outages in 2014 or 2015
supports capital tracker treatment of the two components not required by Rule 002.
315. At the hearing, there was a discussion that Rule 002 requirements may be expanded to
include elements beyond the “three per cent of the circuits with the highest SAIDI values”
currently proscribed.270 In subsequent capital tracker proceedings, the Commission will consider
modifying the scope of Fortis’ Worst Performing Feeders capital tracker program in the event the
requirements of Rule 002 have been amended.
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.
317. Specifically, the 2014 capital expenditures forecast of $3.0 million is based on the list of
19 worst performing feeders as shown in Appendix A-7, Attachment 2.271 The Commission has
reviewed the information supporting Fortis’ 2014 forecasts and finds the total annual forecast to
be reasonable when compared to the 2013 actual expenditures272 and based on the list of specific
feeders subject to this program in 2013273 and 2014.
318. Regarding the 2015 forecast, Fortis stated that it will identify the specific worst
performing circuits to be addressed in 2015 in early 2015. Therefore, Fortis proposed that the
2015 capital expenditures forecast for this program be equal to the 2014 number of
$3.0 million.274 The Commission acknowledges that because Fortis’ forecast for the Worst
Performing Feeders program for a coming year is based on the rolling average of the outages
from the previous 12-month June to May period,275 the specific list of projects to be undertaken
in 2015 was not available at the time of filing the 2013-2015 capital tracker application.
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.
320. Given the above determinations, the Commission is unable to determine if the scope,
level, timing and forecast costs for the Worst Performing Feeders program as proposed for 2014
270
271
272
273
274
275
Transcript, Volume 4, pages 692-695 (Mr. Eck).
Exhibit 38, Appendix A-7, Attachment 2.
Exhibit 36, Appendix A-7, Table 1 on page 12.
Exhibit 37, Appendix A-7, Attachment 1.
Exhibit 36, Appendix A-7, page 13.
Transcript, Volume 3, page 497, lines 2-14 (Mr. Eck).
Decision 3220-D01-2015 (March 5, 2015) • 79
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
and 2015 are reasonable at this time. Accordingly, the Commission cannot make a finding at this
time that this program, as modified by the Commission’s directions, satisfies the project
assessment requirement of Criterion 1.
7.2.8
Pole Management program
321. Fortis described the Pole Management program as a grouping of capital projects designed
to maximize the service life of Fortis’ existing poles and to replace poles that fail inspection.
Pole inspection and testing are undertaken in order to determine pole condition. Pole life
extension measures include external stubs, wraps and treatments (fumigants and treatment rods).
Pole replacement is determined based on Fortis’ end-of-life inspection criteria. Under this
program, the replacement of poles includes like-for-like replacements and line rebuilds including
pole realignments.
322. Fortis is applying for capital tracker treatment for this program in 2013 on an actual
expenditures basis and in 2014 and 2015 on a forecast expenditures basis. The actual capital
expenditures for 2013 were $15.6 million with net capital additions of $14.3 million. Total
capital expenditures are forecast at $31.4 million in 2014 and $39.9 million in 2015 with net
capital additions of $28.9 million in 2014 and $37.8 million in 2015.
323. Fortis provided a business case for this program in its application including five
attachments titled: Standard for In-Service Wood Pole Inspection and Re-Treatment; U.S. Army
Corps of Engineers – Additional Wood Pole Data; Surface Rot calculations; and details on two
line-rebuild projects (64L rebuild and the Sulphur Mountain rebuild).276
324. Fortis stated that under sections 105 and 127 of the Electric Utilities Act, Fortis, as the
owner of an electric distribution system, is obligated to operate and maintain its system in a safe
and reliable manner. Fortis also bears similar obligations under Section 10 (Overhead Systems)
of the Alberta Electrical Utility Code. Given these statutory responsibilities, Fortis supports these
obligations by extending the service lives of poles, improving system reliability, reducing the inservice failure rate, improving employee and public safety, and facilitating the systematic
replacement of vintage assets. This program was previously approved in Decision 2008-011,
Decision 2010-309 and Decision 2012-108.
325. Fortis has approximately 1,000,000 poles in-service. The maximum expected service life
of treated poles is estimated by Fortis to be between 50 and 70 years. During the 1950s, Fortis
expanded its system to accommodate the growing demand for electricity in rural Alberta. Fortis
indicated that these vintage poles were not full-length pressure treated but rather butt-treated
only and, therefore, would be more susceptible to surface rot than poles of a newer vintage.
Currently, Fortis estimates it has approximately 35,000 butt-treated poles still in service. Fortis
indicated that the application reflected an expanded program to replace poles installed before
1960 because these poles are at or near the end of their service lives. This is because out of the
poles tested between 2003 and 2007 that were deemed substandard, 65 per cent on average were
poles installed before 1960, where this percentage climbed to 73 per cent in 2011.277
326. Pole testing is completed on a seven-year cycle. Patrols are conducted on one-seventh of
Fortis’ system each year, with poles older than 15 years being tested. This represents
276
277
Exhibits 41 to 45, application.
Exhibit 40, application, pages 4-5.
80 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
approximately 79,000 poles being patrolled each year. The number of poles managed by the
program varies annually based on the pole vintages of the circuits undergoing detailed patrols.
Fortis stated that its seven-year cycle is based on the Oregon State University (OSU) Utility Pole
Research Cooperative’s 21st Annual Report. The seven-year cycle enables Fortis to coordinate it
with other testing requirements during detailed line patrols and to maximize the time the
chemical treatment is active in poles before re-treatment.278 Fortis stated that a fumigant
treatment is effective for seven years.279
327. Fortis indicated that poles that are 15 years of age or older, but installed after 1960, and
pass the pole inspection process receive internal preservative treatment. In addition, the 1960s,
1970s and 1980s vintage poles that pass the inspection also receive external treatment. Poles that
do not pass the inspections are identified for replacement or reinforcement (stubbing) in the
following year. Immediate pole replacements are also performed on poles that are in need of
urgent replacement.280
328. Fortis considered two alternatives for the program. Alternative 1 included replacing poles
based only on physical failure, while Alternative 2 included replacing poles based on pole test
failures and poles installed before 1960. Fortis stated that Alternative 1 was unacceptable due to
system reliability and safety concerns, and is not in keeping with good utility practice. Fortis
recommended Alternative 2 as it maintains reliability, minimizes employee safety hazards
associated with poles that are unsafe to climb and minimizes public safety hazards by reducing
failures of poles that have reached the end of their service lives.281 Expenditures for the pole
replacement (including line rebuilds) and life extension activities program were determined by
multiplying the actual or forecast volume of pole replacements and life extension activities by
the actual or forecast unit costs. Fortis provided the following tables:
Table 28. 2013-2015 Pole Management program capital expenditures282
2013 actual
Replacements
Stubs
Wraps
Treatments
Rebuilds
Total
278
279
280
281
282
8.0
2014 forecast
($ million)
20.1
0.1
1.1
2.4
3.9
15.6
0.2
1.2
2.0
8.2
31.4
2015 forecast
24.7
0.2
4.0
3.5
8.5
39.9
Exhibit 40, application, page 9.
Exhibit 78.02, AUC-FAI-15.
Exhibit 40, application, page 9.
Exhibit 40, application, pages 13-14.
Exhibit 40, application, Table 6, page 11.
Decision 3220-D01-2015 (March 5, 2015) • 81
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Table 29. 2013-2015 Pole Replacements and Life Extension283
2013 actual
Replacements
Stubs
Wraps
Treatments
2014 forecast
(volumes)
10,000
261
23,814
79,426
4,030
176
23,887
95,826
2015 forecast
12,000
260
77,303
130,345
Table 30. 2013-2015 Pole Replacements and Life Extension unit costs284
2013 actual
Replacements (includes rebuilds)
Stubs
Wraps
Treatments
2,960
579
50.55
25.00
2014 forecast
($)
2,802
590
51.51
25.47
2015 forecast
2,693
602
52.54
25.98
329. In AUC-FAI-13, Fortis was asked to provide information supporting the individual 2013
line-rebuild projects and associated actual expenditures of $3.9 million referred to in Table 28
above. Fortis indicated that there were 16 line-rebuild projects with forecast costs for each
individual project totaling $446,661.285 No actual costs information was provided.
330. Fortis provided two line-rebuild projects including the 64L rebuild project at a 2014
forecast amount of $1,929,000 and the Sulphur Mountain rebuild project at a 2014 forecast
amount of $514,000. Fortis identified an additional 93 line-rebuild projects for 2014, at a
forecast cost for each individual project totaling $5,185,673.286 The combined 2014 projects total
amount is forecast at $7,628,673. Table 28 above, however, reflects the total 2014 line-rebuild
capital expenditure forecast at $8.2 million.
331. Fortis stated that it does not prepare detailed documents similar to those provided for the
64L and the Sulphur Mountain line-rebuild projects for line-rebuild projects of less than
$500,000. Specifically, those detailed documents included a project description, project driver,
schedule, costs, potential alternatives and preliminary construction plan views showing the
project diagram. For 2014 projects, however, Fortis did include project map diagrams for linerebuild projects that exceed $100,000.
332. Fortis identified 14 line-rebuild projects for 2015, with a forecast cost of approximately
$2,454,715 million.287 Fortis also provided a document for the rebuild of the 52 line at a forecast
cost of $1,114,598 in 2015288 for a total of approximately $3.6 million. In Table 28, however, the
2015 line-rebuild capital expenditure forecast is $8.5 million, reflecting the fact that not all
projects for 2015 can be identified at this time. Fortis indicated in its information response that
283
284
285
286
287
288
Exhibit 40, application, Table 3, page 10.
Exhibit 40, application, Table 4, page 10.
Exhibit 78.02, AUC-FAI-13(d).
Exhibit 78.02, AUC-FAI-13(c).
Exhibit 78.02, AUC-FAI-13(e).
Exhibit 78.29, attachment to AUC-FAI-13.01.
82 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
the list will be updated as Fortis continues to analyze data from the 2014 Pole Management
Program. Fortis provided the following capital expenditures and net capital additions to rate base
associated with the Pole Management program for 2013, 2014 and 2015 below:
Table 31. Pole Management program net capital additions289
2013
actual
Capital expenditures
CWIP
Retirements
AFUDC and indirect capitalized overhead costs
Net capital additions
15.6
0.8
(2.7)
2014
forecast
($ million)
31.4
(0.5)
(3.1)
2015
forecast
39.9
(0.2)
(3.3)
0.6
1.1
1.4
14.3
28.9
37.8
333. As discussed in Section 6, Fortis deferred certain elements of the Pole Management
program, resulting in reduced capital expenditures for 2013 from amounts originally forecast. In
adjusting the 2013 capital expenditures, Fortis stated that it assessed which capital expenditures
could be prudently and practically deferred. In doing so, pre-1960 vintage butt-treated pole
replacements were deferred into 2015, 2016 and 2017. Life extensions (treatments and wraps)
scheduled for 2013 were carried out in 2013 as planned.
334. Fortis stated that it had originally forecast the replacement of 10,000 poles in 2013.
However, Fortis actually replaced only 4,030 poles in 2013. Fortis stated that approximately
3,500 of the 4,030 poles replaced were vintage, butt-treated poles that failed pole testing. The
5,970 pole replacements that were deferred were all vintage, butt-treated pole replacements that
did not fail pole testing.290 In the hearing, Fortis stated that these vintage, butt-treated poles
passed the surface rot test for the short-term, and that temporary safety protocols were put in
place for these poles.291 Despite this 2013 deferral, Fortis confirmed that capital expenditures are
forecast to return to levels consistent with 2011 and 2012, as approved in Decision 2010-309 and
Decision 2012-108 for 2014 and 2015.
335. Fortis provided a table in the business case outlining the 2011 and 2012 forecast of
10,000 poles for replacement.292 The actual poles replaced in 2011 was 10,074, and the actual
poles replaced in 2012 was 9,577. The 2014 forecast is also 10,000 poles. None of the 5,970
poles deferred in 2013 are scheduled for removal in 2014. For the 2015 forecast, the original plan
prior to the 2013 deferral was to replace 10,000 poles in 2015. However, Fortis added an
additional volume of 2,000 poles out of the 5,970 poles that had been deferred from 2013,
thereby increasing the volume forecast to12,000 for replacement.293
336. In the hearing, Mr. Eck explained why none of the 5,970 poles deferred for replacement
in 2013 had not been rescheduled for replacement in 2014, indicating that Fortis did not have
sufficient resources in place in 2014. For the 2013 deferred poles, Fortis stated that many of the
resources for its unit price contractors shifted to other areas within the province, and there was
289
290
291
292
293
Exhibit 63, application, paragraph 263.
Exhibit 78.02, AUC-FAI-016(a).
Transcript, Volume 3, page 417, lines 3-4 (Mr. Eck).
Exhibit 40, application, Table 5, page 10.
Transcript,Volume 3, page 424, lines 15-22 (Mr. Eck).
Decision 3220-D01-2015 (March 5, 2015) • 83
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
no catch-up in 2014 for the 2013 deferred poles.294 However, based on the seven-year cycle, all
vintage, butt-treated poles need to be removed by the end of 2017, and that the pole failure rate is
increasing for these poles with a steep increase to about 35 per cent for surface rot testing.295 In
justifying the need for escalated removal of pre-1960, butt-treated poles by the end of 2017,
Mr. Eck stated that Fortis based its determination on pole failure rates, the decay curves, survivor
curves for poles of this type, and the rapid increase in the incidence of surface rot.296
337. In discussing whether these poles would be available until the next cycle in 2020,
Mr. Eck stated that:
When we do the treatments, the internal treatments, those we decide to -- we determined
based on a seven-year cycle. For the butt treated, we have a same analysis, but because of
the -- because these poles are reaching the end of their life, meaning that 2017 is the end
of their life, that criteria isn't really applicable. We have to accelerate that program to
remove the poles even if they didn't -- even if they passed the test.
So the expiration rate is exponential as the pole reached the end of its life. So the sevenyear cycle is actually shorter when the pole reaches the end of its life.297
338.
Mr. Eck also stated that:
… to continue with the same approach we did in 2013 and simply replace the poles that
fail, we would have a snowball effect and by the end -- or within 2017, we would actually
have to replace close to 24,000 poles in one year. That wouldn't be possible no matter
how many resources or how many dollars we had available. And that's the reason for us
to recommence back on replacing these poles at the same rate as we did pre-2013.298
339. Mr. Eck confirmed that there were no negative consequences in the short term and that
the quality or safety affecting the ability of the company to provide adequate service levels in
2013 was not affected as a result. However, a continued delay will increase costs and reduce
reliability in the long term. This is because there would be a significant number of poles to
replace in 2017, which would result in the deterioration of service as Fortis would not have the
capacity to replace these poles. Delaying the replacement of butt-treated poles in the long term
also results in increased pole failures, leading to decreased system reliability. There is also an
increased safety concern due to the climb-ability constraints of these poles.299
340. In determining whether any additional costs would be incurred in the future as a result of
the deferral in 2013, Mr. Eck explained that Fortis selected areas where there would not be any
additional increases in costs for customers and that individual pole structures require the same
amount of effort pertaining to mobilization. As there were no mobilization teams provided to the
deferral locations in 2013, there would not be any increase in costs to customers due to the
deferral. In addition, Fortis is also observing a reduction in pole replacement costs because of its
ability to reuse certain poles under a material used program that was developed in 2013.300
294
295
296
297
298
299
300
Transcript, Volume 3, page 419, lines 22-25 and page 432, lines 1-6 (Mr. Eck).
Transcript, Volume 3, page 412, lines 4-24 (Mr. Eck).
Transcript, Volume 3, page 413, lines 17-24 (Mr. Eck).
Transcript, Volume 3, page 243, lines 9-22 (Mr. Eck).
Transcript, Volume 3, page 413, lines 1-10 (Mr. Eck).
Exhibit 78.02, AUC-FAI-16(d).
Transcript, Volume 3, page 415, lines 1-18 (Mr. Eck).
84 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Mr. Eck also confirmed that no penalties arose from the non-fulfillment of contractual
obligations associated with the delays.301
341. Mr. Shymanski, on behalf of the UCA, raised concerns with respect to the delay of
capital expenditures for this program in 2013302 and the effect of that delay on the eligibility of
pole replacement costs for capital tracker treatment. These issues are discussed in Section 6.
342. Mr. Shymanski commented on the lack of available detail supporting the forecast capital
additions for line-rebuild projects in 2015. The UCA stated that Fortis’ 2015 forecast for linerebuild projects is $8.5 million. The 14 individual line-rebuild projects identified in the 2015
capital additions had a total cost of $2,454,715.303
343. According to the UCA, additional information and/or further refinements relating to the
2015 pole management capital additions project would likely be provided at some future date.
However, in the interim, the UCA’s position was that sufficient information was not provided by
Fortis to justify the proposed amount for the 2015 capital tracker relating to pole management
capital additions. Accordingly, the UCA recommended the capital additions amount included in
the 2015 capital tracker be the same as the amount included in the 2014 capital tracker.304
344.
The UCA stated that:
While this approach for forecasting an amount of costs for the Pole Management program
in 2015 might have been appropriate under cost of service regulation, the PBR Capital
Tracker requirements to justify the proposed costs (i.e. Criterion 2 and 3 and in particular
Criterion including paragraph 1092 of Decision 2013-435) are far more stringent than
those that may have been used, directly or indirectly, under cost of service. It is simply
not enough, in the UCA’s view, to say” We will need “X” amount of dollars to replace so
many poles in 2015 and we will tell you later the detail on where within our system or in
which areas we will be replacing those poles.” In the UCA’s view, that approach is not
good enough to satisfy all 3 criteria for Capital tracker approval (and in particular
criterion 1 assessed in light of paragraph 1092 of Decision 2013-435.305
345. In reply argument, Fortis stated that its methodology is reasonable and is a proper
forecasting approach that should be accepted by the Commission. Fortis further noted that the
UCA’s assertion that cost forecasting must be “far more stringent” than under cost-of-service
regulation is incorrect and ignores the existence of, and effect of, the true-up process.306
346. In the following exchange with Commission counsel, Mr. Shymanski confirmed that he
did not have a concern with the Fortis’ forecasting methodology, rather the concern related to the
available detail on pole replacement projects.
Q. Did you have any issues with the forecasting methodology that Fortis used in relation
to its pole management program?
A. Not in total. I mean, they've taken unit costs. They've said we're going to replace X
number of poles. It's a detail around where they're going to be replacing them.
301
302
303
304
305
306
Transcript, Volume 3, page 418, lines 2-6 (Mr. Eck).
Exhibit 3220-X0003, UCA argument, paragraphs 43-44.
Exhibit 3220-X0003, UCA argument paragraph 47.
Exhibit 3220-X0003, UCA argument, paragraph 47.
Exhibit 3220-X0003, UCA argument, paragraph 48.
Exhibit 3220-X005, FAI reply argument, paragraph 34.
Decision 3220-D01-2015 (March 5, 2015) • 85
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Q. So although there's no problem with the forecast methodology, because they can't
provide the specifics in relation to the projects they're going to undertake, that's why you
think there should be a reduction?
A. Yes307
Commission findings
347. Fortis did not request capital tracker treatment for its Pole Management program in its
2013 capital tracker application. However, as noted at paragraph 48 of Decision 2013-435,
companies may apply for capital tracker treatment of capital expenditures after the capital
additions are made. Fortis is requesting capital tracker treatment for the Pole Management
program for 2013, 2014 and 2015 based on the actual capital additions in 2013 and forecast
capital additions in 2014 and 2015. Forecast capital additions under the Pole Management
program included in general tariff applications have been approved by the Commission in
Decision 2008-011, Decision 2010-309 and Decision 2012-108.
348. In Section 6, the Commission determined it will not disqualify from capital tracker
treatment the five 2013 capital tracker projects or programs delayed, in whole or in part, because
of the “uncertainty as to the nature and extent of capital tracker treatment.” The Commission has
reviewed the business case and engineering study provided by Fortis and the balance of the
evidence on the record of this proceeding with respect to Fortis’ Pole Management program and
finds that the information provided by Fortis supports a finding that the program was required to
maintain service reliability and safety at adequate levels during 2013, to extend the service life of
its poles, to improve system reliability and reduce the in-service failure rate, to improve
employee and public safety, and to facilitate the systematic replacement of pre-1960, butt-treated
poles.
349. The Commission stated in Section 6 that it would review in this decision the prudence of
the capital expenditures incurred on the portion of the Pole Management program that was
carried out in 2013 and not deferred into future years.
350. With respect to Fortis’ request for capital tracker treatment for the Pole Management
program in 2013 based on actual capital additions, the Commission has reviewed the scope, level
and timing of the program carried out in 2013, and the 2013 actual capital additions of
$14.3 million and actual capital expenditures of $15.6 million.Further, the Commission has
reviewed the costs of the actual capital additions for this proposed capital tracker program in
light of the evidence supporting these costs, the associated procurement and construction
practices and the evidence explaining the difference between forecast and actual costs. 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.
351. The Commission notes that Fortis stated that it does not prepare documents similar to
those provided for the 64L, the Sulphur Mountain and the 52L line-rebuild projects for linerebuild projects of less than $500,000. In the absence of sufficient evidence in support of the
307
Transcript, Volume 4, page 755, lines 20-25 and page 756, lines 1-6 (Mr. Shymanski).
86 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
line-rebuild projects completed in 2013, Fortis cannot be said to have satisfied the onus to
demonstrate that these projects satisfy the project assessment requirements of Criterion 1.
Accordingly, the 2013 line-rebuild projects are not approved for capital tracker treatment at this
time.
352. However, as set out at paragraph 615 of Decision 2012-237, a company may choose to
undertake a capital investment prior to applying for capital tracker treatment in a subsequent
annual capital tracker filing. In other words, a company does not have to wait for the
Commission’s approval of its forecast for capital tracker treatment to proceed with projects
required to maintain service reliability and safety at adequate levels. Because the Commission
has not ruled on the prudence of the 2013 line-rebuild projects, Fortis may reapply for capital
tracker treatment of the 2013 line-rebuild projects in a future capital tracker application. The
Commission would expect information detailing project descriptions, actual unit costs and other
relevant information necessary to support the timing, level, scope and costs of the individual
projects.
353. Fortis also requested capital tracker treatment for the pole management program in 2014
and 2015. The Commission finds no evidence on the record to indicate that the Pole
Management program is not required for 2014 or 2015. With respect to the scope, level and
timing of this program for 2014 and 2015, the Commission has reviewed the business case and
the relevant portions of the record for this program and finds the forecast scope, level and timing
of the program for 2014 and 2015 to be reasonable.
354. In Section 6, the Commission stated it will consider for capital tracker treatment in 2014
and 2015 the portions of the five projects or programs deferred from 2013 into 2014 and 2015.
Fortis’ forecast capital additions associated with this program are $28.9 million in 2014 and
$37.8 million in 2015, including the projects deferred from 2013. The Commission has reviewed
Fortis’ forecasting methodology presented in this business case in which multiplying the forecast
volume of pole replacement and life extension activities by the forecast unit cost is used to
determine the anticipated capital expenditures. The Commission has analyzed the forecast unit
costs provided in Table 30 and the forecast volume of pole replacements and life extensions
provided in Table 29 and, subject to the Commission findings in the subsections below, finds
these forecasts and the application of the methodology to be reasonable.
355. Given the above, the Commission finds, subject to the Commission findings in the
subsections below, that the information provided by Fortis supports a finding that the scope,
level, timing and forecast costs for the pole replacement and life extension activities component
of Pole Management program are reasonable as proposed for 2014 and 2015. Accordingly, the
Commission finds that this portion of the program satisfies the project assessment requirement of
Criterion 1 for 2014 and 2015.
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 $5,185,673.308 The total of
308
Exhibit 78.02, AUC-FAI-13(c).
Decision 3220-D01-2015 (March 5, 2015) • 87
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
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.
357. However, because the Commission has not ruled on the reasonableness of the 2014 linerebuild projects other than the 64L and Sulphur Mountain projects, Fortis may reapply for capital
tracker treatment for the balance of the 2014 line-rebuild projects in a future capital tracker
application. The Commission would expect information detailing project descriptions, actual
units costs and other relevant information necessary to support the timing, level, scope and costs
of the individual projects.
358. With respect to line-rebuild projects forecast for 2015, Fortis provided a list of 14 linerebuild projects, with a forecast cost of $2,454,715.309 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 2015.310 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.”311
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.
360. However, because the Commission has not ruled on the reasonableness of the 2015 linerebuild projects other than the 52L project, Fortis may reapply for capital tracker treatment for
the balance of the 2015 line-rebuild projects in a future capital tracker application. The
Commission would expect information detailing project descriptions, actual or forecast units
costs and other relevant information necessary to support the timing, level, scope and costs of the
individual projects.
361. For 2014 and 2015 line-rebuild projects, the Commission considered the UCA’s position
about the amount of information provided in the business case. The Commission notes that
Mr. Shymanski had no concern with Fortis’ forecasting methodology provided in the business
case; instead, his concern was with the details of where the line rebuilds will be undertaken.
Mr. Shymanski proposed that the forecast capital additions associated with this program for
309
310
311
Exhibit 78.02, AUC-FAI-13(e).
Exhibit 78.29, attachment to AUC-FAI-13.01.
Exhibit 78.02, AUC-FAI-14(a).
88 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
2015, in the amount of $37.8 million, be reduced to the forecast capital additions for 2014 in the
amount of $28.9 million. Given the findings of the Commission with respect to line-rebuild
projects in 2015 above, it does not need to consider Mr. Shymanski’s recommendations further.
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.
363.
7.2.8.1
Additional findings regarding the pole management program are provided below.
Prudent Capital Maintenance and Replacement program, pole inspections and
pole testing frequency for the Pole Management program
364. In argument, the CCA raised an issue with respect to the prudence of the Capital
Maintenance and Replacement program, the 10-year-old pole inspection and maintenance
procedures and the seven-year pole frequency cycle based on the OSU Utility Pole Research
Cooperative’s 21st Annual Report.
365. With respect to the prudence of the Capital Maintenance and Replacement program, the
CCA indicated that Fortis has never done a thorough review of its pole inspection and
maintenance procedures. The CCA cited paragraph 1092 of Decision 2013-435, which requires a
utility to provide “evidence that the capital project could not have been undertaken in the past as
part of a prudent capital maintenance and replacement program.” Given that Fortis has never
undertaken a review of its Pole Replacement program, the CCA submitted that Fortis has failed
this requirement for capital tracker treatment. As a result, the CCA recommended the capital
tracker be denied.312
366. The CCA also raised an issue with Fortis’ seven-year pole inspection cycle. The CCA
stated that during the hearing, Fortis was unable to produce the OSU Utility Pole Research
Cooperative 21st Annual Report referred to by Fortis, and directed the CCA to a website. In
argument, the CCA stated that it was able to source the OSU’s Utility Pole Research
Cooperative’s 29th Annual Report in the hearing, which is the 2009 version, and provided
statements from the report, as follows:
The risk of the K above the ground can be estimated using average monthly temperatures and
days of precipitation to produce a climate index (Sheffer 1971). For example, when exposed in
cool dry regions, such as those in the upper great basin, can be inspected less frequently than
those in subtropical southern Florida.
…….
Most utilities in North America physically inspect poles on a 10 to 15 year cycle.
………
An examination of national field inspection data suggests that a 10 to 12 year cycle is best;313
367. The CCA also raised concern with Fortis’ prior consideration of its pole inspection
cycles, which were conducted between 18 and 22 years ago as reflected in the following
exchange at the hearing:
312
313
Exhibit 3220-X0004, CCA argument, paragraphs 139-142.
Exhibit 107.1, hearing exhibit, pages 3 and 97.
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FortisAlberta Inc.
Q. …..So yesterday, Mr. Eck, you were discussing the Oregon State paper with Mr.
Wachowich, and you had the following exchange with him. And this is at Transcript page
245, and it starts at line 16, and it says: “Q. But, sir, you said you undertook a review of
the seven-year cycle as to its appropriateness. When was that review undertaken?” And
your answer was, “We did that back in 1996 --between 1992 and 1996.” So that review
was undertaken before the assets were owned by Fortis; correct?
A. MR. ECK: That’s correct.
Q. So Fortis has never looked at the inspection cycle to determine if it’s still appropriate;
correct?
A. MR. ECK: We do have one of our senior engineers; he’s a member of OSU. So we
keep updated with the OSU, I guess the treatments and the new engineering treatments
and stuff that they have in the industry.
As I mentioned, one of the restrictions we have in Canada is importing other treatments
that are utilized in the US. Because we're using metam sodium, if you look at pole
treatment, the active ingredient is known as MITC, that's M-I-T-C. Whatever chemical is
used would have to dissolve and turn into MITC for it to be effective. Metam sodium
when it dissolves into the wood, the equivalent MITC is about 32 percent so it's not as
effective.
Treatment life cycler or cycle times are based on the permeability of the wood itself, and
that's dependent on the species as well as what we refer to as the sap wood depth. Based
on the wood species and the sample that we use, our determination is that seven-year
cycle is at the threshold where the treatment isn't as effective anymore and hence the
reason for a seven-year cycle.
If we were to extend that cycle beyond seven years, then those poles would have a shorter
overall lifespan. And if you look at the cost to replace poles, it's far higher than
completing these treatments.314
368. The CCA stated that OSU Utility Pole Research Cooperative’s 29th Annual Report
involves utilities across North America, where Alberta would qualify as a cool dry region
compared to the rest of North America. As a result, and given the optimal cycle of 10 to 12 years
for pole inspections, the CCA stated that it is also likely that a reasonable cycle for Alberta
would be towards the longer end of that recommended cycle.315 Further, there is no credible
support for Fortis’ seven-year cycle. Accordingly, taking into account that it does not appear that
Fortis has reviewed the continued suitability of its pole inspection cycle, the CCA recommended
that the Commission direct Fortis to:316
314
315
316
317

extend its pole inspection lifecycle to a minimum of 10 years

recalculate the accounting test based on the costs that reflect a 10 year rather than a
seven-year inspection cycle317
Transcript, Volume 3, page 436, lines 18-25 to page 438, lines 1-13 (Mr. Eck).
Exhibit 3220-X0004, CCA argument, paragraph 163.
Exhibit 3220-X0004, CCA argument, paragraph 162.
Exhibit 3220-X0004, CCA argument, paragraph 164.
90 • Decision 3220-D01-2015 (March 5, 2015)
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369. In the hearing, Mr. Eck discussed the appropriateness of the seven-year cycle and
confirmed that some chemicals referenced in the report would allow the cycle to be extended to
10 to 15 years. However, these chemicals are not available in Canada.318
370. In response to Commission council questions on whether a longer period could be
incorporated, Mr. Eck further noted that:
A. MR. ECK: We did, as I mentioned to Mr. Wachowich, in 1992, we did work with the
OSU. They did an analysis, and they looked at poles in a similar region. And based on
that analysis - - and it was within the same 2001 report, using metam sodium, the
treatment of is only -- they have a certain threshold where they look at the treatment
being effective against fungi decay. And based on that analysis, they noticed that seven
years was the point where the treatment wasn't effective anymore.
If we were to extend it another two years or three years, then poles will decay or
deteriorate additionally. So what we find is with treatment the, pole life cycle from
decrease from 70 years to about 60 for even 55 years.319
371.
Mr. Eck further advised in an exchange with Commission counsel that:
Q. Right. I just want to confirm a little bit of information here, though. You indicated that
your last review was between 1992 and '96, but you're also indicating that, in fact, you
kind of do a review all the time as a result of a member from Fortis being a part of that
group, OSU?
A. MR. ECK: Yes, that's correct.
Q. Is that correct?
A. MR. ECK: That's correct.
Q. So, in fact, your last review wouldn't be between '92 and '96?
A. MR. ECK: When we look at treatments based on the study we did back in 1996, the
effect is the same. We can't -- there's new technologies, new types
of treatments. If you look at, for example, one of the treatments is called Dazomet.
They're adding like copper naphthenate and copper sulphate, and you could extend the
life using those types of treatments.
Because of the restriction we have with res[pe]ct to the PMRA, it's difficult or it's
imposs[ible] -- at present we can't import the other types of treatments.
And based on that, there's nothing we can do with respect to extending the life of our
poles.320
372. In argument, Fortis stated, with respect to pole testing frequency, that the CCA relied on
general language in an OSU report, in making a request that the Commission direct Fortis to
increase its pole inspection cycle to 10 years.321
Commission findings
373. Fortis utilizes a seven-year cycle as a threshold for its pole testing, which is shorter than
the OSU Utility Pole Research Cooperative 29th Annual Report recommendation of 10 to 12
318
319
320
321
Transcript, Volume 3, page 432, lines 7-10 (Mr. Eck).
Transcript, Volume 3, page 343, lines 20-25 and page 435, lines 1-9 (Mr. Eck).
Transcript, Volume 3, page 438, lines 14-25 and page 439, lines 1-11 (Mr. Eck).
Exhibit 3220-X0005, Fortis reply argument, paragraph 95.
Decision 3220-D01-2015 (March 5, 2015) • 91
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FortisAlberta Inc.
years.322 The report indicates that most utilities in North America physically inspect poles on a 10
to 15 year cycle.323 The seven-year inspection cycle has been the basis for Fortis’ Pole
Management Program, the forecast costs of which have been approved by the Commission in
prior general tariff proceedings. For the purpose of this decision, the Commission finds that there
is insufficient evidence on the record of this proceeding to make a ruling on the continued
suitability of the seven-year inspection cycle. Given the historical use of the seven-year
inspection cycle, previously used in determining program costs and rates approved by the
Commission including the going-in rates, and the PBR principle that “a PBR plan should be easy
to understand, implement and administer and should reduce the regulatory burden over time,” the
Commission is not prepared, in the context of a capital tracker proceeding, to review the
company’s seven-year inspection cycle policy. The continuing suitability of this policy may be
an issue for consideration by the Commission and parties at the end of the current PBR term.
7.2.8.2
Capitalizing pole inspections
374. The CCA raised an issue with respect to the capitalization of pole inspection costs. The
CCA argued that since pole inspections do not extend life, they should not be capitalized,
according to International Financial Reporting Standards. In argument, the CCA explained that
other utilities such as ATCO Electric, EPCOR and AltaLink do not capitalize their pole
inspection costs, and that Fortis’ approach is unusual.324
375. The CCA submitted that the Alberta Energy and Utilities Board (board) rejected the
proposal of AltaLink to capitalize pole testing costs and noted that pole inspection costs could be
considered operating costs under the Generally Accepted Accounting Principles (GAAP).325 The
CCA argued that the AltaLink decision was consistent with the IFRS IAS 16, (Section 7) which
states:
7
The cost of an item of property, plant and equipment shall be recognised as an
asset if, and only if:
(a) it is probable that future economic benefits associated with the item
will flow to the entity; and
(b) the cost of the item can be measured reliably.
376. Accordingly, the CCA submitted that Fortis should not be capitalizing its pole inspection
costs.
377.
322
323
324
325
326
The CCA proposed that the Commission direct Fortis to:

cease capitalizing pole inspection costs

identify the amount of the pole inspection costs that are included in the accounting test
for the Pole Management Program and to remove those costs from the accounting test for
2013, 2014 and 2015 and then recalculate the accounting test.326
Exhibit 3220-X0004, CCA argument, paragraph 157.
Exhibit 3220-X0004, CCA argument, paragraph 157.
Exhibit 3220-X0004, CCA argument, paragraphs 145 and 151.
Decision 2005-019, AltaLink Management Ltd. and TransAlta Utilities Corporation 2004-2007 General Tariff
Application, page 60.
Decision 3220-X0004, CCA argument, paragraph 154.
92 • Decision 3220-D01-2015 (March 5, 2015)
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378. Fortis responded to the CCA position submitting that line patrols are treated as operating
or capital depending on the nature of the line patrol activity. For example, general visual
inspection patrols are charged as operating expenditures. However, detailed line patrols are
considered capital in accordance with IFRS and Rule 026. Detailed line patrols would include
testing to assess the condition of the pole and its remaining life and are completed in targeted
areas under defined cycles. Under IFRS IAS 16, costs related to major inspections are recognized
as part of property, plant and equipment if they meet the asset recognition criteria in IFRS
IAS 16, Section 14.327
379. Fortis further noted that it also performs external, internal and below-ground testing in
conjunction with remediation work to increase the service life of the pole. Pole inspections and
testing also involve activities such as excavating around the poles and drilling holes, which if left
exposed, would be detrimental to the poles. Pole wrap installations and fumigant applications are
also completed at the same time. In addition, these accounting treatments are consistent with the
accounting treatments approved as part of the calculation of 2012 going-in rates.328
380. Fortis stated that it has consistently applied its capitalization policy, both in years leading
up to its going-in rates and thereafter under PBR. Fortis also confirmed that it did not change its
capitalization policy following the implementation of PBR, and is consistent with historical
approaches taken in past general tariff applications.329
381. Fortis also stated that the CCA relied on IFRS IAS 16, Section 7, but ignored IRFS
IAS 16, Section 14, which explicitly provides for the capitalization of inspections.330
Commission findings
382. The Commission accepts that Fortis has not changed its capitalization policy following
the implementation of PBR, and that its capitalization policy is consistent with historical
approaches undertaken in past general tariff applications. Accordingly, the Commission accepts
the capitalization practices utilized by Fortis in the application for purposes of capital tracker
applications during the current PBR term. Changes to capitalization practices of the nature
discussed by the CCA should be reviewed in the next Fortis rate related proceeding.
7.2.8.3
Expected service life for poles and the accounting treatment for infrequent
treatments or wraps in the Pole Management program
383. The CCA raised several concerns related to the expected service life of poles and the
accounting treatment for infrequent treatments and wraps. The CCA referred to the following
information response where Fortis referred to the findings of the Western Wood Preservers
Institute with respect to the anticipated life of wood poles:
The Western Wood Preservers Institute states that “while more research efforts are
needed, the institute believes it is abundantly clear that the current perceived wood pole
life of 35 plus or minus years can be conservatively double[d] to 75 plus or minus years
for the life cycle cost analysis where appropriate inspections and maintenance programs
are included in the project”. FortisAlberta commenced pole treatment application in
327
328
329
330
Exhibit 3220-X0001, FAI argument, paragraphs 381-382.
Exhibit 3220-X0001, FAI argument, paragraph 383.
Transcript, Volume 3, page 455, lines 7-12 (Mr. Lorimer).
Exhibit 3220-X0005, FAI reply argument, paragraphs 93-94.
Decision 3220-D01-2015 (March 5, 2015) • 93
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FortisAlberta Inc.
1996, and therefore cannot confirm a specific time frame for pole life extension with
treatment.331
384. With respect to Fortis’ average service life of 48 years based on a 2010 depreciation
study, the CCA stated that the service life should be reasonably closer to the 75 years that Fortis
uses to justify its Pole Treatment program for new poles. In addition, the CCA noted that Fortis
is treating a large number of poles older than 50 to 60 years, which exceeds the 48-year average
service life.332
385. In argument, Fortis stated that several factors need to be considered pertaining to the
expected service life of a pole. Pole treatments were established in 1996. The estimated life for
poles with life extension is estimated to double only for those poles where treatment was applied
at 15 years of age. Therefore, the service life for poles installed in or before 1981 will not extend
to 70 or 75 years, as is argued by the CCA. Pole treatments also only prevent the progression of
decay. Approximately one-third of in-service poles were installed in or before 1981. Decay in
pre-1981 poles is more pronounced.
386. Fortis also stated that a significant number of poles are removed from service for reasons
other than normal decay. These reasons include road widening, line upgrades, vehicle collisions,
fire and lightning. In addition, Fortis indicated that only a portion of its poles are subject to ideal
conditions and that there are other factors that can shorten the service life including the climate,
soil conditions, insects and animals and pole variations (pole species, preservative treatments,
manufacturing defects and pole handling).333
387. In response, the CCA agreed that weather-related events would be a factor in loss rates.
However, Fortis did not provide any evidence with respect to weather-related losses. Further, the
CCA argued that it was likely some poles affected by road widening and line upgrades could be
salvaged and reused.
388. The CCA also stated that climatic conditions, soil conditions, and insect and animal
effects appeared to have been taken into account in the service life study. The CCA noted that
Alberta has a generally cool and dry climate and that Fortis has provided no evidence to indicate
why a longer average service life should not be achieved.
389. With respect to the accounting treatment for treatment and wraps, the CCA stated that
Fortis is capitalizing treatments and wraps but is choosing not to recognize the extended life of a
pole that may result from these treatments. The CCA considered this to be inconsistent
accounting treatment. The CCA stated that if life is extended by a treatment or a wrap, then these
life extension practices should be recognized in the accounting procedures. The CCA considered
that this inconsistency results in higher rates and a needless tracker.334
390. The CCA noted in argument that infrequent treatments or wraps, with costs of $25 or
$50, are not material and should not be capitalized according to the CPA Canada Handbook, as
stated below:
331
332
333
334
Exhibit 79.02, CCA-FAI-032(b).
Exhibit 3220-X0004, CCA argument, paragraphs 166-167.
Exhibit 3220-X0004, CCA argument, paragraphs 394-396.
Exhibit 3220-X0004, CCA argument, paragraph 182.
94 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
Determining whether adding a new clutch to the delivery truck will extend its useful life
or increase its salvage value is not clear cut and pre-determined. A materiality threshold
might dictate whether expensing or capitalizing is more appropriate.
Note that if component accounting is used and the clutch is not identified as a component,
the expenditure related to the installation of a new clutch is expensed.335
391. The CCA noted that if the Commission determined that treatment and wraps should be
capitalized, then this determination would be based on the fact that the life of a pole is extended
due to these treatments and wraps. The CCA argued that, if the service life of a pole is 75 years
when treatments and wraps are applied, then the average service life used in calculating the
capital tracker should reflect this outcome. The CCA stated that “one cannot have it both ways;
that is to capitalize the wrap and treatment costs yet use a service lives for poles which do not
reflect treatment.”336
392. The CCA stated that it views capitalization as a two-part test. The first test is materiality.
If the costs of treatments and wraps are not material when measured against the cost of the pole,
then they should be expensed. However, if the Commission views the costs as material, then the
costs have to pass a second test. If these costs are capitalized because they will extend the life of
a pole, then the expected life of the pole should be revised to 75 years.
393.
The CCA recommended the following:
(a) The accounting test should recognize a weighted average of the two distinct pole
population service lives that average approximately 60 years, where this would be done
by adjusting the indicative service life of 35 years.
(b) Alternatively, the Commission can direct Fortis to revise its depreciation rate for poles to
reflect the revised expected service life and then flow this effect through to the
accounting test.337
394. For future depreciation studies, the CCA recommended the following be provided by
Fortis:
(a) split the pole population into pre-and post-1981 vintage poles to reflect the fact that this
is when all poles began to be treated by Fortis;
(b) a decision should be made by Fortis to reconsider replacing all poles over 70 years and
whether this policy should be in place for poles installed and treated since 1981; and
(c) a specific discussion should be reflected with respect to the expected effects of pole
treatments, where this study should show the adjustment to expected service life due to
this component and be distinct from an analysis of the survivor curves. In other words,
Fortis should show the expected service lives as being based on the past practice, which
appears to only consider the survivor curves and then the increment expected, due to
Fortis’s
335
336
337
Chapter 23- Section 3061, Property, Plant and Equipment 176.of the CPA Canada Handbook – Part II
Section 23-44.
Exhibit 3220-X0004, CCA argument, paragraphs 178-180.
Exhibit 3220-X0004, CCA argument, paragraph 183.
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(d) pole treatment program initiated in 1996.338
395. In reply argument, Fortis stated that the CPA Canada Handbook excerpt was raised in
argument and was not provided in the CCA’s evidence. In addition, materiality and capitalization
were addressed under Fortis’ capitalization policy, as summarized below:
Mr. Lorimer was clear (2T212) that FortisAlberta followed the apt IAS standard, and that
FortisAlberta has been consistent in its practices. By contrast, the CCA’s purported
reliance on accounting standards (5T797-799) to alter FortisAlberta’s practices is simply
not borne out when the wording of the particular standard relied upon is reviewed. The
IAS standard is not premised on a materiality test, and FortisAlberta’s practices
underlying Going-in Rates did not include a materiality test. Accordingly, it remains
appropriate for FortisAlberta to capitalize an expenditure if it is capital in nature and if it
is not onerous to do so, regardless of the amount.339
396. Fortis stated that its accounting procedures are appropriate with respect to capitalization
and depreciation. Depreciation rates were used from the most recently approved depreciation
study, which took into account life extension practices and all forms of retirement.340
397. In addition, the Pole Management Program has been in place since 1996, where
successive depreciation studies have reflected the effect of the program on interim retirements, as
well as the effect of all the other forces of retirement bearing upon poles. Service lives were also
properly determined by depreciation studies that considered all data and factors. Fortis noted that
the estimated service life of several distribution system asset classes was increased, where the
estimated approved service life increased from 45 years in 2008, to 48 years in 2010. Therefore,
it would not be appropriate to adjust service lives of assets arbitrarily in this proceeding and that
future depreciation studies would continue to analyze the full set of factors that determine and
influence the life of its distribution system assets, thereby producing proper depreciation rates.341
398. Fortis stated that regardless of a generic reference to a potential life of a pole being
75 years in ideal conditions, poles do not generally exist in ideal conditions, and life extension
treatments do not extend the life of any pole to the extent suggested by the CCA, let alone for the
asset class as a whole.342
399. In response to the recommendation by the CCA that Fortis be directed to alter its
depreciation study approaches, Fortis stated that reclassifying its assets based on the CCA’s
submissions should not be adopted as a part of this proceeding. Fortis explained that, in its next
depreciation study, it will be expected to propose what it and its depreciation expert assess as
proper depreciation rates, to which interveners can provide counter proposals and seek to
promote such proposals.343
Commission findings
400. The Commission agrees with Fortis that treatments and wraps extend the service lives of
poles and, without these measures, the expected service life of a pole would be shorter. With
338
339
340
341
342
343
Exhibit 3220-X0004, CCA argument, paragraph 186.
Exhibit 3220-X0005, Fortis reply argument, paragraph 101.
Exhibit 3220-X0005, Fortis reply argument, paragraph 102.
Exhibit 3220-X0001, Fortis argument, paragraphs 398-404.
Exhibit 3220-X0005, Fortis reply argument, paragraph 99.
Exhibit 3220-X0005, Fortis reply argument, paragraph 104.
96 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
respect to whether infrequent treatments or wraps, at a cost of $25 or $50, are not material and
should not be capitalized according to the CPA Canada Handbook, the Commission notes that
Fortis has not changed its capitalization policy in this proceeding from its capitalization policies
used in previous general tariff proceedings.
401. In the absence of a new depreciation study being filed in the proceeding or otherwise
directed by the Commission, the Commission will not in the context of a capital tracker
proceeding, reopen previously approved depreciation parameters. The Commission notes that in
some instances, changes in depreciation rates during a PBR term may be made as reflected in
paragraph 688 of Decision 2012-237 quoted below.
688.
Fortis, ATCO Electric, ATCO Gas and AltaGas all requested Y factors related to
depreciation changes. The companies requesting these Y factors indicated that
depreciation studies do not occur on an annual basis. However, even when new
depreciation studies are performed, it is not certain that significant changes in
depreciation rates will result. If a substantial change does occur, the change may be a
result of changes in management assumptions, which would cause the change to not be
eligible for flow-through treatment in the form of either a Y factor or Z factor. However,
if the change results from some circumstance that is outside of management control, the
change may be eligible for Z factor treatment. Due to the unforeseeable nature of
depreciation changes, the infrequent occurrence, and the uncertainty as to whether the
changes would be eligible for flow-through treatment, depreciation changes will not be
treated as a Y factor. [footnotes omitted]
402. For the above reasons, the Commission accepts the accounting treatment with respect to
life extension activities and average service life of poles for the purposes of this application, as
these parameters were approved for the current PBR term. The continuing suitability of the
existing depreciation study may be an issue for consideration by the Commission and parties at
the end of the current PBR term.
7.2.9
Cable Management program
403. The purpose of this program is to replace or extend the service life of underground cables
that have reached the end of their service life. The program extends the service life through
rejuvenation or replacement, where cables fail testing or experience repeated failures, thereby
negatively affecting safety, reliability and service to customers. The focus of this program is to
rejuvenate or replace aged underground cables along with associated components, such as
pedestals, neutrals, grounds and outmoded live front transformers, as these other components
also degrade over time, and need to be addressed along with primary cable. Fortis stated that this
program was previously approved in Decision 2008-011, Decision 2010-309 and Decision 2012108.
404. Fortis is not applying for capital tracker treatment for this program for 2013 but is
applying for such treatment in 2014 and 2015. Total capital expenditures are forecast at
$5.0 million in 2014 and $6.0 million in 2015 with net capital additions of $5.0 million in 2014
and $6.0 million in 2015.
405. Fortis stated that under sections 105 and 127 of the Electric Utilities Act, Fortis, as the
owner of a distribution system, is obligated to operate and maintain its system in a safe and
reliable manner. Fortis also bears similar obligations under Section 6 “Grounding” and
Section 12 “Underground Systems” of the Alberta Electrical Utility Code. Given these statutory
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obligations, Fortis maintains that the current condition of the older portion of its underground
system requires the continuation of this program to rejuvenate or replace aged assets in order to
prevent deterioration in overall system reliability. If Fortis were to take a reactive approach to
failures of underground cable and the associated components, it is Fortis’ position that a
reduction in service reliability and increased safety hazards would result.344
406. Fortis stated that the majority of cables targeted for rejuvenation or replacement were
installed between 1967 and 1975. In its distribution system, Fortis has approximately 600 km of
installed medium voltage primary cable that is of 1975 vintage or older. This program was
commenced in 2007 as a pilot project in which Fortis rejuvenated or replaced approximately
100 km of primary cables between 2007 and 2013.345
407. Going forward, Fortis stated that it needs to accelerate this program in 2014 to replace or
rejuvenate approximately 600 km of the 1975 vintage, or older, cables over the next seven years.
These cables have exceeded their expected service life of 30 years. In addition, Fortis explained
that it needs to remove the underground 1975 vintage, or older, cables given the estimated high
failure rates. Fortis stated that if replacement was done at the same rate over the life of the
program as was done under the pilot program, then Fortis would need 25 years to rejuvenate or
replace the cables, which would leave cables in service for over 60 years. Since failure rates
increase as cable ages, this would result in degradation of reliability. Fortis also stated that it
would assess cables on a case-by-case basis in relation to cables that have an unacceptable
number of failures and that are negatively affecting reliability.
408. In the hearing, Mr. Eck stated that the original plan was to complete the pilot project
within a four-year timeframe.346 However, cable testing increased as the program evolved.
Throughout the pilot project year, Mr. Eck indicated that Fortis tested different technologies (low
pressure and high pressure cable injection treatment), tested different types of splices, assessed
different locations, and determined what equipment was available for Fortis in relation to
rejuvenation and replacement of its underground cables.347 Mr. Eck also discussed that Fortis
assessed different conductors, different cable testing methods, determined optimal distances
between rejuvenation and replacement, using different types of injection fluids and how to
improve cable insulation levels.348 Therefore, the pilot program took a longer time than the
originally anticipated four years, as this program was not expanded until Fortis had sufficiently
investigated and tested the alternatives to ensure the most effective approach would be
implemented.349
409. In relation to the acceleration of the program, at the hearing, Mr. Eck, explained that the
initial target is to accelerate the rejuvenation, rather than the replacement, of cable. Mr. Eck
indicated that Fortis did not conduct any type of engineering study. However, Fortis did provide
a historical failure rate table for XLPE cables in the business case.350 This was based on a general
study conducted by Keuring van Elektrotechnische Materialen te Arnhem (KEMA) outlining a
344
345
346
347
348
349
350
Exhibit 46, application, page 5.
Exhibit 46, application, page 3.
Transcript, Volume 4, page 636, lines 9-11 (Mr. Eck).
Transcript, Volume 4, page 365, lines 15-25 and page 363, lines 1-6.
Transcript, Volume 4, page 635, lines 15-15 and page 363, lines 1-21.
Exhibit 78.02, AUC-FAI-17.
Exhibit 46, application, Figure 4, page 7.
98 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
practical method for cable failure rate modeling for different types of cables. Mr. Eck further
noted that:
This was a study that was conducted by KEMA. And if you look at the horizontal axis, it
basically shows the age of the cable, and the vertical axis shows the failure rate in failures
per year per mile.
The cables we have in place -- this is the pre-1975 cables would fall just to the left of that
number 40, so about 39 years. If you go up that axis and you go to the left, you notice
that the failure rate for the existing cables you have is about .2 failures per year per mile.
If you shift to the right, let's say five years, which is midpoint between the 40 and the 50,
and you go up and you hit that exact same graph, you'll notice that -- and you shift to the
left, the failure rate actually increases to .5 failures per year per mile. So it's two and a
half times what it is today.
So given this exponential deterioration, EPCOR -- they're experiencing the same types of
failure rates. We recognize that it's important for us to accelerate this program to prevent
this high level of outage over the next five years.351
410. Mr. Eck further stated that since no study was done specifically for the Fortis network,
Fortis has been using consultants to perform cable testing in different years, in areas of high
cable outages. Based on those cable testing samples, Fortis assesses other areas with similar
types of cables.352
411. When explaining how Fortis determined that it would need to accelerate the program by
100 km per year, Mr. Eck explained that:
We're back to the chart that I showed you. Within the next five years the failure rate
would be 2 1/2 times what it is today, and if you look, we also submitted that chart where
we showed the vintage cables. We looked at the pre-1975 year era, and we had about
600. So looking at 600 and subdivided it by the number of years, that's the how we came
up the 100 kilometres per annum.
412. In its business case, Fortis provides three alternatives including run to fail, continue the
program at the existing rate and accelerate the program. From the three alternatives, Fortis
recommended accelerating the program since addressing vintage cables in the seven-year
timeframe associated with the accelerated program would mitigate the risk of increased failures
resulting in the degradation of reliability. This would also maintain reliability, minimize
disruption to customers, and minimize the exposure of safety hazards to workers and the general
public associated with aged underground cables and components.353 In the hearing, Mr. Eck
stated that if delays to the program occur, and if Fortis were to replace or rejuvenate an amount
less than the proposed 100 km per year, then a deterioration of service quality would occur. Even
though Fortis’ network is composed of only eight per cent primary underground cable, this
would account for 48 per cent of all of Fortis’ customers, so the effect would be significant. 354
351
352
353
354
Transcript, Volume 4, page 640, line 10-25 and page 641, lines 1-5.
Transcript, Volume 4, page 641, lines 10-25 and page 642, lines 1-7 (Mr. Eck).
Exhibit 46, application, pages 16-17.
Transcript, Volume 4, page 648, lines 13-19 (Mr. Eck).
Decision 3220-D01-2015 (March 5, 2015) • 99
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413. Fortis requested capital tracker treatment for this program in 2014 and 2015. The forecast
capital expenditures associated with this program are $5.0 million in 2014 and $6.0 million in
2015. The total forecast capital expenditures for 2014 are composed of $4.5 million for
rejuvenation and $0.5 million for replacement. Similarly, the 2015 forecast for rejuvenation was
$5.3 million and $0.7 million for replacement.355 In the hearing, Mr. Lorimer stated that in 2013,
based on the accounting test, the program did not meet the materiality threshold to qualify for a
capital tracker.356
414. Fortis stated that the forecast to replace or rejuvenate these cables was based on historical
expenditures. For 2013, Fortis rejuvenated 23.6 km of cable and replaced 0.8 km of cable. For
2014, the forecast is 86.3 km for rejuvenation and 2.7 km for replacement. For 2015, the forecast
is 99.7 km for rejuvenation and 3.3 km for replacement.357
415. For 2013, Fortis identified the actual unit cost (dollars per meter) for rejuvenation as
$51 and $199 for replacement. For 2014, the forecast unit cost is $52 for rejuvenation and $203
for replacement. These unit costs were calculated using 2013 actual unit costs, escalated by
inflation. The overall unit cost, in 2014 dollars, is $57 per meter, which reflects historical costs,
including ground and pedestal replacements. The overall unit cost was based on the weighted
average cost of rejuvenation and replacement. Fortis stated that as cables continue to degrade
over time and more cable replacement is needed, this ratio will change, as will the overall unit
cost. For 2015, the forecast unit cost is $53 for rejuvenation, and $207 for replacement.358
416. For 2013, Fortis provided the following table with the actual cost data for seven
rejuvenation or replacement projects:
Table 32. 2013 Cable Management project list – actual359
Project name
Actual
costs
($000)
Actual
km
Actual cost
per km
($000)
Cable Injection - Leduc, Corinthia Park
MP Cable Injection - Spruce Grove
Cable injection - Wetaskiwin
Cable Injection - St. Albert
MP Cable Replacement - Stoney Plain
Cable Injection - Red Deer
Cable injection - Pincher Creek
Total
568
7
131
321
55
193
90
1,366
10.0
0.0
2.9
6.5
0.8
2.3
1.9
24.4
57
45
49
69
83
46
-
417. For 2014, Fortis identified the following fourteen projects. In the hearing, Fortis
explained that these areas experienced the highest cable outages and have the largest effect on
customers. Fortis stated that the 2015 project list would not be compiled until the fourth quarter
of 2014.
355
356
357
358
359
Exhibit 46, application, Table 5, page 15.
Transcript, Volume 4, page 643, lines 2-4.
Exhibit 46, application, Table 2, page 14.
Exhibit 46, application, Table 4, page 15.
Exhibit 78.02, AUC-FAI-018(a).
100 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
Table 33. 2014 Cable Management project list – forecast360
Forecast
cost
($000)
551
Forecast km
10.0
Forecast cost
per km
($000)
55
Cable Injection – Sherwood Park
879
17.0
52
610001237
Replace 3ph Cable – Sherwood
Park
45
0.6
75
610001236
Cable Injection – Taber
347
5.2
67
610001233
Cable Injection – Bow Island
144
2.7
53
610001239
Cable Injection – St. Albert
879
17.0
52
610001238
Cable Injection – Leduc
251
4.8
52
610001235
Cable Injection – Morinville
215
4.2
51
610001232
Cable Injection – Whitecourt
129
3.3
39
610001231
Cable Injection – Westlock
240
4.6
52
610001241
Cable Injection – Claresholm
221
4.2
52
610001234
Cable Injection – Camrose
439
8.5
52
610001230
Cable Injection – Thorsby
156
3.1
51
610001653
Cable Injection – Corinthia Park,
Leduc
94
1.7
57
Replace 40 Pedestals –
Leduc, Corinthia Park
161
0.0
-
14MP - REL - 121S-83LS
Replace U/G 4/0
Secondary Cable – Brooks
113
0.5
226
180
1.6
113
Project name
610001240
610001466
Cable Injection – Brooks
Unplanned projects requiring replacement
418. The following table illustrates how expenditures, customer contributions, CWIP and
capitalized AFUDC and indirect capitalized overheads contribute to the capital addition amounts
for this program for each year.
Table 34. Cable Management program net capital additions361
2014
forecast
2015
forecast
( $ million)
Capital expenditures
CWIP
Retirements
5.0
(0.2)
6.0
(0.2)
AFUDC and indirect capitalized overhead costs
0.2
0.2
Net capital additions
5.0
6.0
360
361
Exhibit 78.02, AUC-FAI-018(b).
Exhibit 63, application, paragraph 281.
Decision 3220-D01-2015 (March 5, 2015) • 101
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Commission findings
419. Fortis requested capital tracker treatment for the Cable Management program for 2014
and 2015. Fortis did not apply for capital tracker treatment for this program in 2013. However,
Fortis continued with this activity in that year. Further, the program was previously approved by
the Commission in Decision 2008-011, Decision 2010-309, and Decision 2012-108.
420. The Commission reviewed the business case provided by Fortis and the evidence on the
record of Proceeding 3220 with respect to Fortis’ Cable Management program, and finds that the
information provided by Fortis supports a finding that the program is required during the
2014-2015 forecast period to maintain service reliability and safety at adequate levels.
421. With respect to the scope, level and timing of this program for 2014 and 2015, the
Commission has reviewed the business case and the relevant portions of the record for this
program and finds the forecast scope, level and timing of the program for 2014 and 2015 to be
reasonable. Fortis’ forecast capital additions associated with this program are $5.0 million in
2014 and $6.0 million in 2015. The Commission has reviewed the information supporting Fortis’
forecasts and finds the total annual cost forecast to be reasonable on the basis of the forecast
methodology described in the business case for this program.
422. Given the above, the Commission finds that the information provided by Fortis supports a
finding that the scope, level, timing and forecast costs for the Cable Management program are
reasonable as proposed for 2014 and 2015. Accordingly, the Commission finds that this program
satisfies the project assessment requirement of Criterion 1.
7.2.10
DCC/SCADA project
423. The Distribution Control Centre (DCC) and Supervisory Control and Data Acquisition
(SCADA) project consists of the implementation of a centralized distribution control centre at
Fortis’ Airdrie operations building and the retrofitting or installation of SCADA field equipment
that is able to communicate with the distribution control centre. Fortis provided details of the
DCC/SCADA project in Appendix A-10 of the application.
424. Fortis is applying for capital tracker treatment for this program in 2013, 2014 and 2015.
Total capital expenditures were $12.8 million in 2013 and are forecast at $6.2 million in 2014
and $4.5 million in 2015 with net capital additions of $18.5 million in 2013, $7.2 million in 2014
and $4.7 million in 2015.
425. The major elements of the DCC component of the project are an extension of the existing
Airdrie facility, completed in 2013; the installation of distribution system technology, including
an Outage Management System (OMS) and SCADA base station, completed in 2013; and the
centralization of the Operator-in-Charge (OIC) function, which involves activities such as
phasing and labeling the distribution system. The major elements of the SCADA component of
this project include the installation of distribution automation (DA) schemes, automatic transfer
(AT) schemes, and SCADA field devices at numerous locations throughout Fortis’ service
territory.
426. Fortis explained that before the implementation of the DCC/SCADA project, the only
method available to mend power outages and interruptions in Fortis’ service area was for the
power line technicians to travel to field devices and manually perform switching activities. Since
Fortis’ distribution system has been growing materially in size and complexity over the past
102 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
decade, there was a need to centralize system control functions such as switching to ensure
continued safe and reliable operation. This is because with Fortis’ large service area and circuitkm of power lines, outage identification and restoration can take considerable time. Fortis added
that before the implementation of this project, it was the only major utility in Alberta operating
with a decentralized operator-in-charge model in place.
427. Fortis indicated that the DCC/SCADA project is required to maintain service reliability,
quality and safety at adequate levels. According to Fortis, the primary benefits of this project
include improved reliability for customers and safety for employees. The DCC/SCADA project
will:362
a. replace antiquated, manual systems that rely on customer calls to identify and
troubleshoot power outages, with an automated OMS;
b. standardize operational procedures
c. improve operational safety for Fortis employees
d. improve distribution system reliability for Fortis customers
e. expedite service restoration
f. improve customer satisfaction
428. In the business case, Fortis also listed specific benefits by component of the
DCC/SCADA project, such as distribution technology systems, centralized OIC and SCADA
field devices.363
429. In 2012, Fortis began the implementation of its DCC project, approved in Decision 2012108. Fortis also pointed out that in Decision 2013-435, dealing with its 2013 forecast capital
tracker application, the Commission accepted the need for the DCC/SCADA project. The
Commission, however, could not determine the reasonableness of forecast costs in that decision
because of the lack of supporting information.364
430. In support of its 2013 actual and 2014-2015 forecast scope, level and timing of the
DCC/SCADA project, Fortis provided a detailed project schedule for each of 2013, 2014 and
2015. According to this schedule, the DCC component was largely finished in 2013, with the
majority of forecast costs for 2014 and 2015 attributable to the SCADA component of the
project.365
431. In the business case, Fortis provided the actual volume of equipment installation and
capital expenditures for 2013, as well as the forecast volume of equipment installation and
capital expenditures for 2014 and 2015 for the project.366 In response to an information request
from the Commission, Fortis provided more detailed cost breakdowns, by component, for the
DCC portion of the project including building facilities, distribution technology systems and
centralized OIC for 2012 and 2013.367 Fortis also provided explanations regarding unit costs for
362
363
364
365
366
367
Exhibit 49, Appendix A-10, pages 10-11.
Exhibit 49, Appendix A-10, pages 11-14.
Decision 2013-435, paragraphs 1052-1053.
Exhibit 49, Appendix A-10, pages 15-16.
Exhibit 49, Appendix A-10, Table 2 and Table 3 on pages 20-21.
Exhibit 78.02, AUC-FAI-31(a).
Decision 3220-D01-2015 (March 5, 2015) • 103
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FortisAlberta Inc.
the automatic transfer schemes under the SCADA portion of the project.368 Table 35 shows
capital expenditures associated with this program for the 2012-2015 period.
Table 35. 2012-2015 capital expenditures for the DCC/SCADA project369
2012
actual
2013
actual
2014
forecast
2015
forecast
($ million)
Building facilities
3.1
7.9
-
-
AESO portion – building facilities
(1.5)
(3.3)
-
-
Distribution technology systems
4.0
3.2
-
-
Centralized OIC
1.0
2.0
1.0
-
Subtotal – DCC
6.6
9.8
1.0
-
Reclosers (hydraulic and electronic)
0.03
0.3
1.3
1.6
AT schemes
-
0.3
0.4
-
DA schemes
-
2.5
3.4
2.9
Subtotal – SCADA field devices
0.03
3.0
5.2
4.5
Total
6.63
12.8
6.2
4.5
Note: minor variances due to rounding.
432. Capital additions associated with this project for 2012-2015 are presented in the table
below.
Table 36. Net Capital Additions for the DCC/SCADA project370
2012
actual
2013
actual
2014
forecast
2015
forecast
($ million)
Capital expenditures
6.6
12.8
6.2
4.5
CWIP
(6.6)
4.7
0.8
-
Other
(AFUDC and indirect capitalized overhead costs)
0.4
1.0
0.2
0.2
Net capital additions
0.4
18.5
7.2
4.7
433. During the hearing, the Commission observed that Fortis’ actual capital expenditures for
this project differed significantly from the initial forecasts put forward in its 2012 tariff
application. In response to an undertaking to the Commission, Fortis explained that under the
terms of the 2012 NSA approved in Decision 2012-108, parties agreed to the completion of the
project over 2012 and 2013, rather than in 2012, as originally proposed by Fortis.371
434. In addition, the 2013 DCC/SCADA actual capital expenditures were $3.0 million lower
than forecast in Fortis’ 2013 capital tracker forecast application (Proceeding 2131). Fortis
368
369
370
371
Exhibit 78.02, AUC-FAI-32.
Exhibit 49, Appendix A-10, Table 3 on page 21 and Exhibit 78.02, AUC-FAI-31(a).
Exhibit 63, application, Table 23 on page 85.
Exhibit 119.
104 • Decision 3220-D01-2015 (March 5, 2015)
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FortisAlberta Inc.
explained that, of this amount, the DCC portion of the project was $2.1 million lower than
forecast because fewer service areas were centralized in the OIC function as resources were
redeployed to respond to the Southern Alberta floods, which delayed implementing the OMS and
the Phasing and Labeling projects. SCADA field devices were $0.9 million lower due to delays
in completing the Leduc/Nisku distribution automation scheme.372
435. Fortis also commented on the reasonableness of the project costs, by component, for the
DCC/SCADA project. Regarding facility expansion, Fortis indicated it used the services of an
engineering consulting firm, Lawson Projects, to act as the lead construction project manager
and to assume the overall accountability for the execution of the expansion. In response to an IR
from the Commission, Fortis stated that
The lead construction project manager was not selected through a competitive bidding
process. The selected project manager had experience in the construction of control
centres and was the lead project manager for the construction of two other utilities’
control centres in Alberta. In addition, the selected project manager was familiar with
FortisAlberta’s DCC/SCADA Project as they had developed and produced the cost
estimates included in the original Distribution Control Centre Business Case, which was
filed as part of the 2012/2013 Distribution Tariff Application.
Based on the construction project manager’s past expertise and knowledge in building
control centres, coupled with their familiarity with the initial construction requirements,
FortisAlberta did not use a competitive bidding process.373
436. During the hearing, Mr. Bahry stated that Fortis considered the services provided by its
lead construction project manager to be cost effective after comparing the charges of this project
manager for similar projects that were delivered for other utilities for their utility buildings.
However, Fortis acknowledged it did not undertake cost comparisons with projects that were
completed by a different project management firm.374
437. In response to an undertaking to the Commission, Fortis added that the facility expansion
project followed “stringent project and construction management guidelines.” Fortis indicated
that Lawson Projects consulted with multiple industry experts to determine design plans and
specifications for the building renovation/construction and generator/electrical requirements.375
Fortis provided further details on the facility expansion project:
The project was designed, tendered, awarded and constructed in two phases:
Phase 1 – New Generators and Electrical Construction for the Generators
Phase 1 of the project was split into two separate tenders:
1. Supply and installation of generators
2. Electrical construction to the generators
372
373
374
375
Exhibit 119.
Exhibit 78.02, AUC-FAI-30.
Transcript, Volume 3, pages 472-473 (Mr. Bahry).
Exhibit 120.
Decision 3220-D01-2015 (March 5, 2015) • 105
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FortisAlberta Inc.
Three separate vendor bids for each tender were received. Total Power (Balor) was
awarded the supply and installation of generators and Trotter Morton was awarded the
electrical construction to the generators.
Phase 2 – Building Renovation and New Construction
Phase 2 of the project was tendered for all building renovations and new construction.
Five vendor bids were received with one vendor, CANA Management Ltd., being
awarded the contract.
In addition, Lawson Projects and Stantec Architecture facilitated the acquisition of
customized workstations for the DCC environment. From previous projects, Lawson
Projects and Stantec Architectures recommended purchasing the required workstations
from a leading control room console supplier, Evans Consoles.376
438. Fortis noted that as part of the extension to the Airdrie facility for the DCC/SCADA
project, it has entered into a 20-year agreement to provide the AESO with facilities and ancillary
services for a system backup data and control centre. As part of the agreement, the AESO
contributed $1.5 million in 2012 and $3.3 million in 2013 towards project costs. These AESO
contribution amounts are included in the K factor calculations associated with this project.377
During the hearing, Fortis clarified that there are no AESO contributions in 2014 or 2015
because those contributions were attributed to the Airdrie facility, which was constructed in 2012
and 2013.378
439. For distribution technology systems, Fortis stated that external cost estimates for
software, IT hardware and services were based on request for information (RFI) responses from
five SCADA vendors and three OMS vendors. The RFI was issued in January 2011 and
responses were received within four weeks of the issue. The vendors were short listed to three
vendors for the SCADA application and two vendors for the OMS application.
440. Forecast expenditures were determined for each component of the distribution technology
systems by assessing the tasks required to complete the project and the effort (in hours) required
for each of the required tasks. The estimated hour requirement was based on experience with
similar past projects, where available. The costs of items for hardware and software licenses
were based on indicative pricing from vendors or obtained from similar, recent projects, where
vendor pricing was not available.379
441. The costs for the centralized Operator-in-Charge component were estimated based on the
pilot project undertaken in 2012 to help develop the detailed network model of Fortis’
distribution system based on its Geographic Information System (GIS). The scope of the project
was identified and a solution was developed that minimized cost, ensured safety and did not
compromise reliability. From this pilot project, Fortis was able to determine a unit cost for each
location that was required to be phased or relabeled. Costs associated with other portions of the
376
377
378
379
Exhibit 120.
Exhibit 63, application, paragraph 302.
Transcript, Volume 3, page 467, lines 10-14 (Mr. Eck).
Exhibit 49, Appendix A-10, page 18.
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centralized OIC component were forecast based on experience with projects that had similar
tasks.380
442. During the hearing, Fortis confirmed that it used a mix of internal labour resources and
contractors to complete the work on the centralized OIC component of the DCC/SCADA project.
Fortis indicated it considered the contractor costs to be competitive:
Q. Okay. And did you compare the costs of those three contractors to determine that you
were getting the best value?
A. MR. ECK: What we do is we look at unit rates for these types of consulting services
using, like, for example, the APEGA standards. We use those rates to determine what
those costs would be.381
443. Regarding the cost of materials used for the centralized OIC component, Mr. Eck
confirmed that
The materials for -- the materials for the centralized operator in charge are materials that
we use within the distribution system. All those materials, as I have mentioned before, go
to a unit cost contract RFP approach. So all the materials would have been bidded or
tendered.382
444. Finally, with regards to the costs of the SCADA component of the project, Fortis
indicated it has technologies and systems installed throughout its distribution system, including
DA systems, AT schemes, transformer protection schemes, and advanced switching and
protection equipment. Through the installation of these SCADA devices, Fortis stated it gained
experience on the costs associated with each type of installation. To accurately forecast the
labour component associated with the SCADA components, Fortis used historical information
and applied appropriate labour rates.
445. Fortis also commented that with the installation of SCADA devices and the OMS, it
reviewed the current technologies it had deployed in the field. Fortis invited four vendors to
submit RFIs for equipment that would integrate with the new technologies. The RFIs were
reviewed from a technical and financial perspective. Engineering assessments were completed
and each vendor was subsequently invited to present its product. Fortis selected a vendor and
developed unit costs for the various materials associated with intelligent electronic devices, DA
schemes, transformer protection schemes, and advanced switching and protection equipment.383
During the hearing, Mr. Eck confirmed that the purchase of SCADA devices goes “through our
normal unit price contracts that we do on an annual or on an every three-year basis, depending on
the type of contract.”384
446. Overall, Fortis indicated that its Distribution Design and Construction Standards, Service
and Metering Guide, and Customer Terms and Conditions serve as the foundation for the
Company’s provision of safe, reliable service at reasonable cost. Fortis also stated that in
addition to the cost minimization methods used in completing all programs and projects (as
380
381
382
383
384
Exhibit 49, Appendix A-10, page 18.
Transcript, Volume 3, page 477, line 20 to page 478, line 5 (Mr. Eck).
Transcript, Volume 3, page 478, lines 8-13 (Mr. Eck).
Exhibit 49, Appendix A-10, page 19.
Transcript, Volume 3, page 480, lines 18-22 (Mr. Eck).
Decision 3220-D01-2015 (March 5, 2015) • 107
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FortisAlberta Inc.
discussed in Section 7.1.1 of this decision), it employed some additional methods to minimize
the level of capital expenditures for this project, including:
a. selecting the DCC/SCADA modules to ensure compatibility and expandability to
mitigate rework costs
b. consulting with other utilities using a DCC/SCADA system to benefit from lessons
learned to mitigate project risks and minimize costs
c. entering into an agreement with the AESO to provide facilities and ancillary services for
a system backup data and control centre
d. use of a RFP process to obtain competitive quotes for vendor services385
447. The UCA did not raise any issues with the DCC/SCADA project in its evidence and
argument. As discussed in Section 5, the CCA objected to the proposed grouping of the
DCC/SCADA project as a separate capital tracker project. However, the CCA did not object to
the need for this project or to its costs.
Commission findings
448. In Decision 2013-435, the Commission determined that the DCC/SCADA project was
required to maintain service reliability, quality and safety at adequate levels in 2013. However,
the Commission could not assess the reasonableness of the forecast costs for this project given
the insufficient documentation to support the 2013 forecast expenditures.386
449. As noted in Section 3, if the need for a project in 2013 was previously established in
Decision 2013-435 and if there is no evidence on the record of this proceeding demonstrating
that the project was not in fact required in 2013, then there is no need to again demonstrate that a
project is needed in order to provide utility service at adequate levels in 2013. The Commission
finds no evidence on the record of this proceeding to indicate that the DCC/SCADA project was
not required in 2013. Accordingly, the project continues to satisfy the requirement of Criterion 1
that the project is needed in 2013.
450. Fortis’ 2013 actual capital expenditures of $12.8 million associated with the
DCC/SCADA project were $3.0 million lower than the $15.8 million forecast put forward in
Proceeding 2131, primarily because fewer service areas were centralized in the OIC function
(under the DCC component) as resources were redeployed to respond to the Southern Alberta
floods.387 The actual capital additions associated with this project in 2013 were $18.5 million, as
shown in Table 36.
451. The Commission is satisfied that a large part of the actual 2012 and 2013 costs associated
with this project were based on contracts subject to a competitive bidding process. The
Commission has reviewed the scope, level and timing of the project in 2013 as well as the costs
of the actual capital additions for this capital tracker project in light of the evidence supporting
these costs, the associated procurement and construction practices and the evidence explaining
the differences between approved forecast and actual costs. The Commission considers the
scope, level, timing and actual costs of the project in 2013 to be prudent. Accordingly, the
385
386
387
Exhibit 49, Appendix A-10, pages 21-22.
Decision 2013-435, paragraph 1052.
Exhibit 119.
108 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Commission finds that this project satisfies the project assessment requirement of Criterion 1 in
2013.
452. Fortis requested to continue capital tracker treatment for this project in 2014 and 2015.
As noted in Section 3, where a forecast program or project is part of a multi-year, ongoing
program or project, or if the program or project is of an annual, recurring nature, that has
previously been approved for capital tracker treatment, in the absence of evidence that the ongoing or recurring project or program is no longer required, the Commission will not undertake a
reassessment of need under Criterion 1. As noted above, the need for the project was established
in Decision 2012-237 for the 2013 year. The Commission finds no evidence on the record of this
proceeding to indicate that the DCC/SCADA project is not required to continue in 2014 or 2015.
Although the CCA objected to the grouping of this project,388 it did not suggest that the project
was not required in 2014 and 2015.
453. With respect to the scope, level and timing of this project for 2014 and 2015, the
Commission has reviewed the business case and the relevant portions of the record for this
project and finds the forecast scope, level and timing of the project for 2014 and 2015 to be
reasonable. Fortis’ forecast capital additions associated with this project are $7.2 million in 2014
and $4.7 million in 2015. The Commission has reviewed the information supporting Fortis’
forecasts and finds the total annual cost forecast to be reasonable based on the cost minimization
methods used in completing all programs and projects discussed in Section 7.1.1 of this decision,
the fact that a large part of the forecast costs associated with this project are based on the
contracts subject to a competitive bidding process,389 the representation that Fortis followed
“stringent project and construction management guidelines”390 and the use of a mixture of
internal and external resources.
454. Given the above, the Commission finds that the information provided by Fortis supports a
finding that the scope, level, timing and forecast costs for the DCC/SCADA project are
reasonable as proposed for 2014 and 2015. Accordingly, the Commission finds that this project
satisfies the project assessment requirement of Criterion 1 in 2014 and 2015.
7.2.11
Compliance, Safety, Aging Facilities and Reliability program
455. Fortis indicated that the Compliance, Safety, Aging Facilities and Reliability (CSAR)
program is driven by the need to maintain the safety and reliability of its distribution assets
throughout its service territory. The CSAR program involves replacing and upgrading
deteriorated, defective, and non-standard distribution equipment identified through line
inspections, technical reviews, or routine operations. Fortis provided details of the CSAR
program in Appendix A-11 of the application.
456. Fortis is applying for capital tracker treatment for this program in 2013, 2014 and 2015.
Total capital expenditures were $7.4 million in 2013 and are forecast at $10.7 million in 2014
and $12.9 million in 2015 with net capital additions of $6.3 million in 2013, $8.8 million in 2014
and $11.4 million in 2015.
388
389
390
Exhibit 81.01, CCA evidence, A21.
Exhibit 49, Appendix A-10, pages 17-19 and Exhibit 120.
Exhibit 120.
Decision 3220-D01-2015 (March 5, 2015) • 109
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
457. Fortis stated that the CSAR Program is required to provide distribution service at
adequate levels and to prevent deterioration in service quality and safety. According to Fortis,
choosing not to proceed with the CSAR program will lead to an increase in failures of
distribution assets and deterioration in Fortis’ reliability performance over time, ultimately
leading to the Company’s failure to meet its obligations under sections 105 and 127 of the
Electric Utilities Act.391
458. Fortis explained that work under the CSAR program is composed of correcting
deficiencies found through detailed line patrols and routine operations. The discovered
deficiencies are prioritized, scheduled and then addressed. Fortis noted that high-priority
deficiencies found during detailed line patrols are addressed separately under the Urgent Repairs
program, discussed in Section 7.2.5 of this decision.
459. Fortis further explained that it performs a visual inspection every year, and a detailed line
patrol inspection of each distribution feeder every seven years. According to Fortis, line
inspections are a requirement of the Alberta Electrical Utility Code, where Fortis, as the operator
of a utility system, is obligated to “ensure that the equipment and lines are visually inspected at
regular intervals, as required.”392
460. The seven-year detailed line patrol involves inspecting approximately 15,000 km of
distribution line per year. A detailed line patrol is a documented inspection of distribution system
facilities and identifies work to be completed under the CSAR program. Patrols require a
thorough inspection of overhead and underground equipment to identify compliance, safety,
aging facilities and reliability issues. Detailed patrols include inspecting underground apparatus
and climbing structures.
461. The line patrol inspections identify distribution plant deficiencies that may affect
compliance, safety, or reliability of service. To avoid return trips, it is Fortis’ practice to
complete the necessary repairs at the time of the patrol if possible, such as installing guy guards.
Other required inspection and testing initiatives are coordinated to occur in the same year as
detailed line patrols, so that a full assessment of facilities in a given region can be completed.
Data from detailed line patrols, pole testing, ground testing, urban assessments, reliability
statistics, asset health ranking, and other field inspections are reviewed to determine required
repairs or replacements. In Fortis’ view, this circuit planning-based approach enables a review
every seven years and allows for the most efficient use of resources.
462. The CSAR program consists of three main activities: compliance and safety, aging
facilities and reliability. Fortis clarified that a particular deficiency may be classified under more
than one of the three activities. For example, an aging facility may need to be addressed due to
issues of compliance, safety, or reliability.
463. Regarding the compliance and safety activity, Fortis indicated that it must ensure that
existing facilities are compliant with regulations, such as the Alberta Electrical Utility Code.
Compliance and safety issues are normally identified during line patrols, through ground testing,
or by pole testing.
391
392
Exhibit 63, application, paragraphs 328-329.
Exhibit 56, Appendix A-11, page 9.
110 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
464. The compliance and safety activity of the CSAR program is composed of six different
initiatives:393
a.
b.
c.
d.
e.
f.
Reduced Clearances
Ground Replacements
Steel Street Light Pole Replacements
Secondary Poles
System Neutrals
Secondary Breaker Boxes
465. The aging facilities activity addresses (by replacement or repair) distribution facilities
that are near the end of their service lives, as identified during detailed line patrols and urban
assessments. Fortis further indicated that aging facilities activity also includes the rebuilding of
sections of the distribution system where these facilities are at the end of their service lives. This
activity also covers a variety of other power line concerns, such as addressing distribution
facilities with components near the end of their service lives that are not covered by other
programs and replacing outmoded equipment, such as underground “T” splices and plastic
pins.394 Additionally, the 2014-2015 forecast for the aging facilities activity includes the costs
associated with the Banff-Sunshine Burial and Joint Use project. Fortis provided details of this
project in Appendix A-11, Attachment 3395 and in response to AUC-FAI-43.396
466. The reliability activity manages issues that cause, or will likely cause, customer outages
or nuisance trips from the distribution system. Reliability deficiencies are identified through
detailed line patrols, feedback from municipal and industrial customers, investigation of major
outages and quarterly meetings of a cross-functional reliability team. Maintenance projects are
prioritized to enable Fortis to complete higher priority projects first, where reliability is most at
risk if the planned action does not take place. Many reliability initiatives are completed the year
following identification, depending on the assessed risk.
467.
a.
b.
c.
d.
e.
f.
Reliability issues are addressed under the following initiatives:397
Bird Proofing
Conductor Management
Insulator Replacement
General Reliability
Protective Coatings
TELUS Mitigation
468. Fortis indicated that the forecast for the CSAR program is based on unit cost estimates
for specific initiatives or a combination of both. Unit costs are determined by considering the
historical unit costs, adjusted for inflation. Initiative-specific estimates are based on project
requirements, such as line lengths, major components and construction standards. Table 37
provides details of the forecasting method for each of the initiatives under this program.
393
394
395
396
397
Exhibit 56, Appendix A-11, pages 3-4.
Exhibit 56, Appendix A-11, pages 5-6.
Exhibit 59, Appendix A-11, Attachment 3.
Exhibit 78.02, AUC-FAI-43.
Exhibit 56, Appendix A-11, page 6.
Decision 3220-D01-2015 (March 5, 2015) • 111
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Table 37. Forecast method for the CSAR program initiatives
Unit costs
Detailed Line Patrols
Initiative-specific
Both
X
Compliance and Safety
Reduced Clearances
X
Ground Replacement
X
Steel Pole Replacements
X
Secondary Poles
X
System Neutrals
X
Secondary Breaker Boxes
X
Aging Facilities
X
Reliability
Bird Proofing
X
Conductor Management
X
Insulator Replacement
X
General Reliability
X
Protective Coatings
X
TELUS Mitigation
X
469. For the initiatives that rely on the unit costs method, the forecast is developed by
multiplying the unit costs by the number of units (e.g., poles or transformers) either identified
during detailed line patrols from the previous year or estimated based on historical trends of
replacements. Fortis’ forecast unit costs are based on the previous year’s unit costs escalated by
inflation.
470. Under the initiative-specific method, forecast costs are mainly based on specific projects
or reliability issues identified during detailed line patrols and urban assessments conducted in the
previous year. Projects may be added throughout the year as issues are identified and deemed
high-risk. Historical trends are also used to determine how many additional projects are likely to
arise during the year.398
471. Fortis provided lists of the projects for each initiative under the CSAR program in
Appendix A-11, Attachment 1399 for 2013 and Attachment 2400 for 2014. Fortis clarified that a list
of 2015 projects under the CSAR program will be compiled following the completion of the
2014 detailed line patrols.401
472. Fortis provided details of the actual unit costs and number of units for 2013, as well as
forecast unit costs and number of units for 2014 and 2015 for the detailed line patrols,
compliance and safety, as well as reliability components of the CSAR program.402 In response to
an information request from the Commission, Fortis provided the actual unit costs, number of
398
399
400
401
402
Exhibit 56, Appendix A-11, pages 26-29.
Exhibit 57, Appendix A-11, Attachment 1.
Exhibit 58, Appendix A-11, Attachment 2.
Exhibit 56, Appendix A-11, page 25.
Exhibit 56, Appendix A-11, Table 12 on page 29 and Table 13 on page 30.
112 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
units and the resulting capital expenditures for the components of the CSAR program for the
years 2008 to 2012, as well.403 Table 38 shows capital expenditures associated with this program
for the 2012-2015 period.
Table 38. 2012-2015 capital expenditures for the CSAR program404
2012
actual
2013
actual
2014
forecast
2015
forecast
($ million)
Detailed line patrols
1.1
1.2
1.1
1.6
Reduced Clearances
1.8
0.9
1.2
1.4
Ground Replacement
0.3
0.4
0.6
0.6
Steel Pole Replacements
0.5
0.9
0.7
0.7
Secondary Poles
0.03
0.1
0.0
0.0
System Neutrals
0.2
0.1
0.6
0.6
Secondary Breaker Boxes
0.5
0.1
0.5
0.5
Aging facilities
0.8
0.2
0.8
2.3
Bird Proofing
0.3
0.3
0.6
0.6
Conductor Management
1.9
0.2
0.6
0.7
Insulator Replacement
0.1
0.0
0.0
0.0
General Reliability
2.2
2.6
3.4
3.4
Protective Coatings
0.3
0.2
0.2
0.2
TELUS Mitigation
0.0
0.2
0.3
0.3
Total capital expenditures
10.2
7.4
10.7
12.9
Compliance and safety
Reliability
403
404
Exhibit 78.02, AUC-FAI-42.
Exhibit 78.02, AUC-FAI-42, Table 14.
Decision 3220-D01-2015 (March 5, 2015) • 113
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
473. Capital additions associated with this program for 2013-2015 are presented in the table
below.
Table 39. Net capital additions for the CSAR program405
2013
actual
2014
forecast
2015
forecast
($ million)
Capital expenditures
7.4
10.7
12.9
CWIP
0.1
(0.6)
(0.3)
Retirements
(1.4)
(1.6)
(1.7)
Other
(AFUDC and indirect capitalized overhead
costs)
0.2
0.3
0.5
Net capital additions
6.3
8.8
11.4
474. Regarding the reasonableness of the program costs, Fortis indicated that its Distribution
Design and Construction Standards, Service and Metering Guide, and Customer Terms and
Conditions serve as the foundation for the company’s provision of safe, reliable service at
reasonable cost. Fortis also stated that in addition to the cost minimization methods used in
completing all programs and projects (as discussed in Section 7.1.1 of this decision), it employs
some additional methods to minimize the level of capital expenditures for this program,
including:
a. other required inspection and testing initiatives are coordinated to occur in the same year
as detailed line patrols, so that a full assessment of facilities in a given region can be
completed
b. repairs to facilities within these initiatives are coordinated to optimize asset life and
minimize resource requirements406
475. Finally, Fortis indicated that the CSAR program was one of the programs deferred in
2013 because of the lack of certainty with respect to capital expenditures under the capital
tracker mechanism. In adjusting 2013 capital expenditures, Fortis indicated it assessed those
expenditures “which could be prudently and practically deferred in the short term.” In assessing
the CSAR program, Fortis decided to defer some projects in Aging Facilities, System Neutrals,
Conductor Management and Secondary Breaker Boxes. According to Fortis, this was only a
short-term measure, and the CSAR program initiatives originally scheduled for 2013 have been
deferred to 2014 and 2015.407 As shown in Table 39 above, the 2013 actual capital expenditures
for the CSAR program are $2.8 million or 27 per cent lower than the 2012 actual capital
expenditures.
476. In his evidence, Mr. Shymanski, on behalf of the UCA, recommended that the projects
Fortis deferred from 2013 to 2014-2015, including the CSAR program, not be afforded capital
tracker treatment; and capital additions effects associated with the deferral be removed from the
405
406
407
Exhibit 63, application, Table 25 on page 91.
Exhibit 56, Appendix A-11, page 32.
Exhibit 56, Appendix A-11, page 31 with corrections identified in Exhibit 104.03.
114 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
2014 K factor calculation.408 This recommendation was addressed in Section 6 of this decision.
Mr. Shymanski did not take any other issue with the CSAR program.
477. The CCA, in its evidence and in its argument, expressed concerns with the proportion of
overhead costs that Fortis allocated to its capital tracker projects or programs. This matter was
dealt with in Section 7.1.2 of this decision. In addition, the CCA, in its argument, expressed
concerns with Fortis’ grouping of its capital tracker projects or programs, as discussed in Section
5. Besides those two concerns that apply to all of Fortis’ capital trackers, the CCA did not take
any other issue with the CSAR program.
Commission findings
478. Fortis requested capital tracker treatment for the CSAR program based on the actual
capital additions in 2013 and based on forecast capital additions in 2014 and 2015. The program
was previously approved by the Commission in Decision 2008-011, Decision 2010-309 and
Decision 2012-108, dealing with Fortis’ past tariff applications.
479. In Section 6, the Commission determined it will not disqualify from capital tracker
treatment the five 2013 capital tracker projects or programs delayed, in whole or in part,
including the CSAR program, because of the “uncertainty as to the nature and extent of capital
tracker treatment.”
480. The Commission has reviewed the business case and the evidence on the record with
respect to the CSAR program and finds that the information provided by Fortis supports a
finding that the program was required to maintain service reliability and safety at adequate levels
during 2013, to replace and upgrade deteriorated, defective and non-standard distribution
equipment identified through line inspections, technical reviews or routine operations. Further,
based on the record of this proceeding, the CSAR program remains necessary in 2014 and 2015.
481. With respect to Fortis’ request for capital tracker treatment for 2013 based on 2013 actual
capital additions, the Commission has reviewed the scope, level and timing of the CSAR
program carried out in 2013 and the 2013 actual capital additions of $6.3 million. The
Commission stated in Section 6 that with respect to the portion of these five projects or programs
completed in 2013, the Commission will consider the prudence of the actual 2013 capital
additions in this decision. The Commission has reviewed the scope, level and timing of the
program in 2013 as well as the costs of the actual capital additions for this proposed capital
tracker program in light of the evidence supporting these costs and the associated procurement
and construction practices. The Commission finds the scope, level, timing and actual costs for
this program in 2013 to be prudent. Accordingly, the Commission finds that the CSAR program
satisfies the project assessment requirement of Criterion 1 in 2013.
482. Fortis also requested capital tracker treatment for this program in 2014 and 2015. As
noted above, the Commission finds that the program is needed in 2014 and 2015. With respect to
the scope, level and timing of this program for 2014 and 2015, the Commission has reviewed the
business case and the relevant portions of the record for this program and finds the forecast
scope, level and timing of the program for 2014 and 2015 to be reasonable. In Section 6, the
Commission stated it will consider, for capital tracker treatment in 2014 and 2015, the portions
of the five projects or programs deferred from 2013 into 2014 and 2015.
408
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 12-15.
Decision 3220-D01-2015 (March 5, 2015) • 115
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
483. The forecast capital additions associated with this program are $8.8 million in 2014 and
$11.4 million in 2015. The 2014 forecast is based on the specific list of projects identified
through line patrols in 2013; the 2014 forecast unit costs were estimated by escalating the 2013
actual unit costs by inflation. The 2015 forecast is based on the 2014 unit costs escalated by
inflation. In addition, the increase in 2015 capital expenditures, as compared to 2014, is largely
driven by the expected increase in detailed line patrols and the expenditures on the BanffSunshine Burial and Joint Use project as part of the aging facilities activity.409 Fortis provided
details of this project in Appendix A-11, Attachment 3410 and in response to AUC-FAI-43.411 The
Commission has reviewed the information supporting Fortis’ forecasts and finds the total annual
forecast for 2014 and 2015 to be reasonable based on the forecast methodology outlined in its
business case412 and in response to AUC-FAI-42.413
484. Given the above, the Commission finds that the information provided by Fortis supports a
finding that the scope, level, timing and forecast costs for the CSAR program are reasonable as
proposed for 2014 and 2015. Accordingly, the Commission finds that this program satisfies the
project assessment requirement of Criterion 1 in 2014 and 2015.
485. Fortis indicated that, in assessing the volume of work to be undertaken under the CSAR
program, it relies on data from detailed line patrols, pole testing, ground testing, urban
assessments, reliability statistics, asset health ranking and other field inspections.414 In its
information request AUC-FAI-39, the Commission inquired about the asset health ranking
methodology that Fortis employs. Fortis responded:
At FortisAlberta, the practice of assigning asset health rankings to circuits is at an early
stage. FortisAlberta uses asset health ranking to rank distribution circuits in a manner that
identifies those with the highest risk of interruptions or failures. Asset health ranking
considers SAIDI, SAIFI, average pole age, average conductor age, number of existing
repairs, wind loading zone, and number of outstanding maintenance projects on a
specified distribution circuit. Using this data, FortisAlberta prioritizes CSAR activities
accordingly.
[…]
Asset health ranking is used only to identify and rank distribution circuits that require
further investigation to identify the causes and possible solutions to reliability issues.
Asset health ranking is a combination of reliability statistics, asset age statistics, and
other indices as explained above. Asset health programs are not standardized, but are
becoming more commonly used by utilities across the country.415
‘
486. During the hearing, Mr. Eck further elaborated that Fortis is currently working with a
consultant to develop an asset health ranking system similar to systems used by distribution
companies in the U.S.416 Mr. Eck stated:
409
410
411
412
413
414
415
416
Exhibit 56, Appendix A-11, tables 13 and 14 on pages 30-31.
Exhibit 59, Appendix A-11, Attachment 3.
Exhibit 78.02, AUC-FAI-43.
Exhibit 56, Appendix A-11, pages 25-31.
Exhibit 78.02, AUC-FAI-43.
Exhibit 56, Appendix A-11, page 3.
Exhibit 78.02, AUC-FAI-39.
Transcript, Volume 3, page 499. lines 2-7 (Mr. Eck).
116 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
The system we use, we use a seven-year preventative maintenance cycle given the
database that we have, given the types of circuits that we have. The asset health ranking
system would help with assessing -- or trying to automate or prioritize the feeders that we
look at. However, we're still, like I mentioned, in the infancy stage, so we're still trying to
see if there is any area that we could improve. We determine what areas to focus on on
those circuits.417
487. In the Commission’s view, the development of a formal asset health ranking system will
benefit the Commission and interested parties in their understanding of the priority of projects to
be undertaken in a particular year under Fortis’ CSAR program and possibly other maintenance
programs. In doing so, a formal asset health ranking system will facilitate the Commission’s
determination that the scope, level, timing and costs of forecast capital projects are reasonable
and actual costs are prudently incurred. The Commission directs Fortis to provide updates on the
development of the asset health ranking system in its subsequent capital tracker applications.
7.2.12
Metering Unmetered Oilfield Services project
488. The Metering Unmetered Oilfield Services project consists of converting existing
unmetered oilfield services with a connected load of five kilowatts (kW) or greater to metered
services with the installation of energy and demand metering. The primary business driver for
metering oilfield sites is to improve the accuracy of billing and load settlement by providing
actual consumption data to the billing system, the load settlement system, retailers, and
customers. The project also includes the conversion of three-wire to four-wire systems at these
sites to eliminate safety hazards associated with three-wire systems.418 Fortis provided an
overview of this project at Section 3.13 of its application. Fortis provided further details in
Appendix A-12.
489. Fortis is applying for capital tracker treatment for this project in 2013 on an actual
expenditures basis and in 2014 and 2015 on a forecast expenditures basis. The following table
shows the total capital expenditures and capital additions.
Table 40. Metering Unmetered Oilfield Services project net capital additions419
2013
actual
2014
forecast
2015
forecast
($ million)
Capital expenditures
CWIP
Retirements
AFUDC and indirect capitalized overhead
0.2
-
0.4
-
9.4
0.3
Net capital additions
0.2
0.4
9.7
490. In his evidence, Mr. Shymanski on behalf of the UCA, recommended that Fortis’ projects
deferred from 2013 to 2014 or 2015, including the Metering Unmetered Oilfield Services
project, not be afforded capital tracker treatment; and the capital additions impact of the deferral
417
418
419
Transcript, Volume 3, page 499, line 15 to page 500, line 2 (Mr. Eck).
Exhibit 63, application, paragraph 336.
Exhibit 63, application, paragraph 342.
Decision 3220-D01-2015 (March 5, 2015) • 117
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
be removed from the 2014 K factor calculation.420 This recommendation was addressed in
Section 6 of this decision.
491. In argument, the UCA submitted that the entire applied-for amounts for 2013 through
2015 for this project should be denied capital tracker status. In the UCA’s view, this project does
not qualify for capital tracker treatment.
t
492.
The UCA submitted that:
FAI did not properly examine the requirements of this program as far back as the 2010 —
2011 GTA. Notwithstanding approval to commence and complete the program by 2013,
FAI found additional scope issues, issues that should have been determined in the first
instance, delayed work on the rationale that the 2013 PBR decision had not been issued,
as well as due to manpower issues (with manpower being diverted to other projects of no
particular level of importance higher than this project), and cites no particular reason to
complete the program by 2015 other than a “directive” requirement that FAI has already
breached, has been largely mitigated and is otherwise prepared to extend beyond 2015.
…if FAI had planned this program appropriately, it could have been completed in prior
years as forecast. The fact that it was not demonstrates a violation of the requirements in
item (e) of paragraph 1092 of Decision 2013-435. Using the words from that paragraph,
there is no valid reason why this “capital project could not have been undertaken in the
past as part of a prudent capital maintenance and replacement program.” Indeed, by
FAI’s own admission, it was directed to do so. The deferral also shows that FAI
considered this a project subject to management discretion, thus running afoul of another
of the Commission’s criterion for determining whether a project is a proper subject for
capital tracker treatment.
While FAI has remedied the safety and customer tampering issues in 2013 and 2014
some of which should have been identified and fixed in years prior to that (i.e. the
program was due to be complete in 2013), it is clear that FAI should have foreseen these
issues and completed the project in 2013, notwithstanding its concern about the outcome
of the PBR proceeding. There is on the basis of the evidence, certainly no requirement for
FAI to complete this program by 2015 given the safety fixes that were instituted in 2013
and 2014 and there is no evidence of deterioration in service quality if the program
completion is delayed beyond 2015 and thus FAI has not met item (c) of paragraph 1092
either.421
493.
In reply argument, Fortis submitted that:
The UCA suggestion that the work could have been undertaken earlier expressly ignores
how the prudent evolution of the program has seen it develop into one where line rebuilds
are at the heart of the program.422
.. while safety issues concerning the mix of three-wire and four-wire loads supplied by
a four-wire source were corrected, a safety issue remains where a four-wire source
supplies four wire loads where a neutral does not exist.423
420
421
422
423
Exhibit 82.02, UCA evidence of Mr. Shymanski, pages 12-15.
Exhibit 3220-X0003, paragraphs 56-58.
Exhibit 3220-X0005, Fortis reply argument, paragraph 37.
Exhibit 3220-X0005, Fortis reply argument, paragraph 42.
118 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
494. The CCA, in its evidence and in its argument, expressed concerns with the amount of
overhead costs that Fortis allocated to its capital tracker projects or programs. This matter was
dealt with in Section 7.1.2 of this decision. In addition, the CCA, in its argument, expressed
concerns with Fortis’ grouping of its capital tracker projects or programs, as discussed in
Section 5. Besides those two concerns that apply to all of Fortis’ capital trackers, the CCA did
not have any specific issues with the Metering Unmetered Oilfield Services project.
495. During the hearing, the Commission questioned the scope and timing of this project.
Fortis confirmed that it had proposed to upgrade approximately 10,500 unmetered oilfield sites
to metered sites throughout a four-year period commencing in 2010. The program was reassessed
in 2010 as it was realized that Fortis had to separate any of the loads that were four-wire into
separate supply. The project was reduced to 6,700 sites as those under five kW would not be
metered. The project was amalgamated with a program called the three-wire to four conversion.
Three thousand meters were installed between 2010 and 2013 and this included reconstructing
distribution lines to comply with codes. The metering program was deferred in 2013 due to the
uncertainty in the capital tracker program. Some of the work was subsequently deferred to 2015
due to resource constraints (a shortage of designers and metering technicians) in 2014. The work
to convert the three-wire sites to four-wire sites was completed prior to 2013. Fortis indicated
that it would be possible to defer further some of the work to 2016. Fortis explained that it had
placed seals on customer equipment but that in 40 per cent of the cases customers had broken the
seals to reconfigure equipment.424
Commission findings
496. This project was initially applied for in Fortis’ 2010-2011 GTA, with a planned four-year
implementation commencing in 2010 and was approved in Decision 2010-309 at paragraph 526.
However, there have been significant delays in completing this project for the reasons indicated
above.
497. The Commission finds that the need for this project has been established based on the
requirement to meter customers and on safety considerations.
498. With respect to the scope, level and timing of the Metering Unmetered Oil Field Sites
project carried out in 2013, the Commission has reviewed the actual capital additions and
expenditures associated with this project. The Commission has also reviewed the costs of the
actual capital additions for this capital tracker project in light of the evidence supporting these
costs, and the evidence explaining the differences between approved forecast and actual costs,
and finds the actual costs to be prudent.
499. The actual capital additions of $0.2 million are approved for 2013. The forecast capital
additions of $0.4 million for 2014 and $9.7 million for 2015 are approved. The Commission
finds that the Metering Unmetered Oilfield Services project satisfies Criterion 1 on an actual
basis for 2013 and on a forecast basis for 2014 and 2015.
424
Transcript, Volume 3, pages 529-550.
Decision 3220-D01-2015 (March 5, 2015) • 119
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
8
Accounting test under Criterion 1 – the project must be outside of the normal
course of the company’s ongoing operations and Commission conclusion on
Criterion 1
8.1
Fortis’ accounting test model
500. As explained in Decision 2013-435, the purpose of the accounting test is to determine
whether a project or program (depending on the approved level of grouping) proposed for capital
tracker treatment is outside the normal course of the company’s on-going operations. This is
achieved by demonstrating that the associated revenue provided under the I-X mechanism would
not be sufficient to recover the entire revenue requirement associated with the prudent capital
expenditures for the program or project.425
501. In Decision 2013-435, the Commission determined that the accounting test should be
based on a “project net cost approach,” which is sufficient to satisfy the Commission that all of
the forecast or actual expenditures for a capital project or program are, or a portion is, outside the
normal course of the company’s on-going operations, as required to satisfy Criterion 1. Under
this approach, the extent to which a project is underfunded by the I-X mechanism is calculated
by comparing the forecast or actual revenue requirement for that program or project to the goingin revenue historically associated with a similar type of capital expenditure escalated by I-X and
including the effect on revenue of any changes in billing determinants.426 The Commission
referred to the latter component, the effect on revenue of any changes in billing determinants,
calculated as the forecast percentage change in billing determinants in any given PBR year, as
“Q.”427
502. Fortis has performed the accounting test in accordance with the methodology set out in
Decision 2013-435, which involved the following steps:
(i)
The rate base included in going-in rates, which was determined and approved by the
Commission in the 2012 NSA,428 was allocated to each project or program. The going-in
rate base for each project or program was incorporated in schedules 2 and 3 of
Appendix B.429
(ii)
The going-in revenue requirement for each project or program was determined by
calculating the depreciation and return for 2012 on the historical buildup of the net capital
additions and mid-year rate base, respectively. The indicative service life approved in the
company’s 2012 NSA was used for calculating the depreciation for 2012. The return for
each project or program was derived by multiplying the mid-year net book value by the
2012 weighted average cost of capital (WACC) approved in Decision 2013-072.
Schedule 4, Appendix B contains the calculations for the return for each project or
program.
(iii)
The going-in revenue requirements associated with each project or program was
escalated by I-X and the growth in billing determinants. The calculations for the escalated
revenues for 2013, 2014 and 2015 are illustrated in Schedule 5 of Appendix B.
425
426
427
428
429
Decision 2013-435, paragraphs 906-908.
Decision 2013-435, paragraphs 262-263.
Decision 2013-435, paragraph 499.
Proceeding 1147, Application 1607159-1.
Exhibit 61, Appendix B, application.
120 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
(iv)
The revenue requirement for each project or program was calculated for 2013, 2014 and
2015 by using the rate base by project or program determined in (i) and (ii) above,
updated with the actual amounts for the 2011 and 2012 net capital additions, respectively.
The actual net capital additions and depreciation for 2013 and forecast net capital
additions and depreciation for 2014 and 2015 by project or program, respectively, were
then added to determine a total rate base and related revenue requirement. Schedules 8,
10 and 12 of Appendix B demonstrate the calculations of the depreciation and return by
project or program for each year.
(v)
The actual revenue requirement for 2013 and forecast revenue requirement for 2014 and
2015 were compared to the revenue requirements funded by the I-X mechanism for each
project or program for each of the years from 2013 to 2015 in order to calculate any
shortfall.
503. In order to determine the portion of the going-in rate base and associated revenue
requirement that will be allocated to each of its capital projects or programs for its accounting
test, Fortis reviewed its historical records. For the period 2004 to 2012, Fortis was able to
segregate the capital additions within its distribution systems’ ledger accounts by year and by
category for each of the projects or programs. However, even though it had information on total
capital additions from the period 2001 to 2003, it did not have sufficient data to separate the
additions by each project or program. Consequently, it allocated the capital additions to each
project or program by using proportions calculated from the 2004 to 2012 nine-year capital
additions data. Fortis justified its estimation methodology by explaining that this period was
sufficiently long to be representative of the proportion of capital additions for each project or
program to total capital additions.
504. Fortis also submitted that it did not include an income tax component in its revenue
requirement calculations since the company is not expected to pay income taxes through 2015.
Commission findings
505. The Commission has reviewed Fortis’ schedules that make up its accounting test analysis
and finds them to be reasonable and generally consistent with the accounting test methodology
approved in Decision 2013-435. The Commission has also reviewed Fortis’ methodology of
determining the portion of the going-in rate base and associated revenue requirement that will be
allocated to each of its capital projects or programs for its accounting test and finds it reasonable.
506. The Commission also notes and accepts Fortis’ methodology of not incorporating a tax
component in its revenue requirement calculations in light of the fact that it received a two
percentage point adjustment to its common equity ratio because of its non-taxable status.430
507. Sections 8.2 and 8.3 that follow deal with the issues concerning certain inputs into Fortis’
accounting test. Specifically, the I-X index, Q factor and the WACC rate. Subject to
determinations on these issues as set out below, the Commission is satisfied that Fortis’
accounting test model can be used to demonstrate that all of the forecast or actual expenditures
for a capital program are, or a portion is, outside the normal course of the company’s on-going
operations, as part of the requirements to satisfy Criterion 1.
430
Decision 2011-474: 2011 Generic Cost of Capital, Proceeding 833,Application 1606549, December 8, 2011,
paragraph 244.
Decision 3220-D01-2015 (March 5, 2015) • 121
2013-2015 PBR Capital Tracker Application
8.2
FortisAlberta Inc.
I-X index and Q factor used in the accounting test
508. Consistent with the amounts approved in Decision 2013-072, Fortis used an X factor for
2013, 2014, and 2015 of 1.16 per cent. The I factor used in the accounting test for 2013 was
2.87 per cent and 2.75 per cent for 2014, as approved in Decision 2013-072431 and Decision
2013-464, respectively. Fortis used the approved 2014 I factor of 2.75 per cent as a placeholder
for its 2015 I factor, which will eventually require a true-up once the 2015 I factor is approved.
509. Fortis calculated the 2013 and 2014 forecast billing determinant growth, or “Q,” of
1.27 per cent and 1.90 per cent, respectively, based on the relevant forecast billing determinants
approved in Decision 2013-072 and Decision 2013-464, respectively. Fortis calculated a 2015
billing determinant forecast for this application, which it provided in Appendix C.432 When Fortis
submitted its application, its 2012-2014 Phase II DTA Compliance application433 was still being
processed and it had not yet received the Commission’s decision regarding its 2014 rate
structures. 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 Proceeding
3103. Fortis provided the following as the reasons behind its proposal:
It is recognized that while “Q” is characterized in the Decision as billing determinants
growth, it is actually the percentage growth in revenue due to overall changes in billing
determinants from year to year, across all rate classes and components, including energy,
demand, and the number of customers. As such, when rates by rate class or the
underlying rate structures are changed, this must be taken into account to arrive at the
appropriate forecast of “Q” – the revenue growth associated with changes to billing
determinants from year to year.434
Commission findings
510. The accounting test and K factor calculations use the I-X index and Q factor as inputs. It
is the Commission’s preference to use an I-X index that has previously been approved in a
separate annual PBR rates adjustment proceeding and a Q factor based on an approved billing
determinants forecast, whenever possible, if timing allows. However, it is important to
distinguish that the approved I-X index and forecast billing determinants values are not
subsequently updated to reflect actuals.
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.
431
432
433
434
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, March 4, 2013.
Exhibit 62, application, Appendix 6.
Proceeding 3103, Application 1610368-1.
Exhibit 63, application, paragraph 97.
122 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
512. Regarding the I-X index and Q factor values used for purposes of capital tracker forecast
applications, the Commission acknowledges that, because these applications are typically filed
before the September 10 date of the annual PBR rate adjustment filings, a company may be
required to estimate the I factor and Q factor for the coming year. For example, in the accounting
test for the 2014 capital tracker forecast, Fortis used the approved 2014 I-X index and billing
determinants, as they were known at the time of the application. However, there were no
approved values for 2015. Therefore, in the accounting test for 2015, Fortis used a placeholder
for the I factor based on the approved 2014 I factor. Fortis calculated its 2015 Q factor of
2.49 per cent based on a preliminary forecast of its 2015 billing determinants. This preliminary
forecast was based on the same methodology employed for producing the 2013 and 2014
forecasts, which were subsequently approved in Decision 2013-072 and Decision 2013-464,
respectively. The Commission accepts, in principle, the use of such forecasting methods when
the final approved numbers are not available.
513. The Commission also notes and agrees with Fortis’ reasoning that changes in rate
structures can create a difference in the values for billing determinants growth and consequently
the findings of Fortis’ Phase II compliance filing will have an effect on the value of the Q factor.
The Commission issued its findings on Fortis’ Phase II compliance filing in Decision
2014-224,435 which included the following determination:
The Commission accepts FortisAlberta’s explanation of the constraints that it is facing
which will prevent implementation of its revised rate structure until January 1, 2015,
including the need to coordinate rate structure changes with other interrelated systems
and projects scheduled to occur within similar timeframes. … The Commission has also
considered the views of the parties in this regard and agrees with the CCA that
FortisAlberta’s proposal is an effective bridging mechanism to use as a base or starting
point for 2015 rates. On this basis, FortisAlberta’s proposed implementation and effective
date of January 1, 2015 for new rate structures is approved.436
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 2014-351437 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
435
436
437
Decision 2014-224: FortisAlberta Inc., 2012-2014 Phase II Distribution Tariff Compliance Filing,
Proceeding 3103, Application 1610368, July 31, 2014.
Decision 2014-224, paragraph 16.
Decision 2014-351 (Errata): FortisAlberta Inc., 2015 Annual PBR Rate Adjustment Filing, Proceeding 3406,
Application 1610836, December 16, 2014, errata February 5, 2015.
Decision 3220-D01-2015 (March 5, 2015) • 123
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
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.
8.3
WACC rate
516. As set out in Section 4.4 of Decision 2013-435, the accounting test, as it relates to
revenue calculations, consists of two components. The first component is the revenue provided
under the I-X mechanism for a project or program proposed for capital tracker treatment. The
second component is the revenue requirement calculations based on the forecast or actual capital
additions for that project or program for a given PBR year.
517. In the calculations for its accounting test, Fortis used the 2012 WACC of 6.85 per cent
approved in Decision 2013-072 for both the first and second component of its accounting test.
Commission findings
518. The Commission initiated Proceeding 3434 to examine the possible use of a consistent
set of assumptions with respect to the values comprising the companies’ respective WACC rates;
specifically, debt rates, ROE rates and capital structure, both on a forecast and actual basis. As
part of that proceeding, the Commission examined the WACC assumptions used by all the
utilities, including Fortis, in both the 2013 capital tracker true-up and the 2014-2015 capital
tracker forecast applications.
519. On January 25, 2015, the Commission issued Decision 3434-D01-2015,438 which
contained its findings from proceeding 3434. In paragraph 99 of that decision, the Commission
gave the following directions:
99.
The Commission finds that it is necessary for the companies to utilize the
methods approved in this decision in their 2013 true-up and 2014-2015 forecast capital
tracker calculations. Accordingly, the Commission directs the companies to incorporate
the findings of this decision in the compliance filings for their 2013 true-up and 20142015 forecast capital trackers applications. The Commission notes that in Section 3.2.3 of
this decision, the Commission determined that the companies are not required to update
the debt rates used in their 2014 and 2015 forecast capital tracker applications because
those 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.
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.
8.4
Commission’s conclusions on Criterion 1
521. In Section 7 of this decision, based on the project assessment under Criterion 1, the
Commission evaluated the need for each project or program that Fortis proposed for capital
438
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..
124 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
tracker treatment either on an actual basis (for 2013) or on a forecast basis (for 2014 or 2015).
The Commission also evaluated the prudency of actual capital additions for the true-up of each
of the capital tracker projects or programs in 2013.
522. In Section 8 of this decision, the Commission found Fortis’ accounting test model to be
reasonable and generally consistent with the accounting test methodology approved in Decision
2013-435. However, in Section 8. 2, the Commission directed some changes with respect to
Fortis’ accounting test assumptions related to the I-X index and Q factor values used in the
accounting test. Also, as noted in Section 8. 3, there are changes that need to be applied to Fortis’
WACC rate assumptions as a result of the findings from Decision 3434-D01-2015.
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.
9
Criterion 2 – ordinarily the project must be for replacement of existing capital
assets or undertaking the project must be required by an external party
524. With respect to Criterion 2, the Commission clarified in Decision 2013-435 that, in
addition to asset replacement projects and projects required by an external party, in principle, a
growth-related project will satisfy the requirements of Criterion 2 where it can be demonstrated
that customer contributions, together with incremental revenues allocated to the project on some
reasonable basis, when added to the revenue provided under the I-X mechanism, are insufficient
to offset the revenue requirement associated with the project in a PBR year.439 Certain projects
proposed for capital tracker treatment that do not fall into any of the growth-related, asset
replacement or external-party-related categories might also satisfy Criterion 2 in certain
circumstances as discussed in Section 3.2.4 of Decision 2013-435.440
525. In the 2013-2015 capital tracker application, Fortis provided evidence in support of its
assertion that its proposed 2013-2015 capital tracker projects or programs satisfy the
requirements of Criterion 2. Fortis assessed each capital tracker project or program and identified
the reasons it considered the project or program satisfies the second capital tracker criterion.
Table 41 below provides a summary of Fortis’ evidence with respect to Criterion 2.
439
440
Decision 2013-435, paragraph 309.
Decision 2013-435, paragraph 314.
Decision 3220-D01-2015 (March 5, 2015) • 125
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Table 41. Applied-for 2013-2015 capital tracker projects or programs and Criterion 2 requirements441
Capital tracker
Customer Growth program
AESO Contributions program
Substation Associated Upgrades program
Distribution Line Moves program
Urgent Repairs program
Distribution Capacity Increases program
Worst Performing Feeders program
Pole Management program
Cable Management program
DCC/SCADA project
CSAR program
Metering Unmetered Oilfield Services project
Criterion 2
project category
Growth
Externally driven
Externally driven
Externally driven
Asset replacement
Growth
Asset replacement
Asset replacement/
life extension
Asset replacement/
life extension
Other
(safety/reliability)
Asset replacement/
life extension
Asset replacement
Application paragraph
(Proceeding 3220,
Exhibit 63)
141
161
178
199
216
237
255
273
291
308
331
348
526. Fortis indicated that each of its projects or programs proposed for capital tracker
treatment can be classified within a Criterion 2 project category. Fortis further clarified that the
table above shows Criterion 2 primary project categories, as some capital tracker projects or
programs may have more than one project driver.
527. Regarding the asset replacement and life extension project category, Fortis highlighted
that in Decision 2013-435, the Commission determined that life extension capital projects or
programs, as defined by a company’s existing capitalization policy, may be considered for
capital tracker treatment under Criterion 2.442 With regards to the DCC/SCADA project, Fortis
pointed out that the Commission specifically addressed the Criterion 2 test for this project in
Decision 2013-435, where it stated:
1052. The Commission has reviewed the business case for DCC/SCADA project and
considers that the information provided by Fortis supports a finding that this project is
required to maintain service reliability, quality and safety at adequate levels. ...
528. In Section 3.2.4 of Decision 2013-435, the Commission determined that the inclusion of
the word “ordinarily” in Criterion 2 means that the criterion does not necessarily restrict capital
tracker treatment to projects that fall into one of the categories of asset replacement, externally
driven, and growth-related. Capital projects may arise during the PBR term that do not precisely
fit into any of these three categories, but may still be eligible for capital tracker treatment where
it can be demonstrated that a project is not adequately funded under the I-X mechanism, and is
sufficiently important to the company, so that its ability to provide utility service at adequate
levels would be compromised if the expenditures are not undertaken.
1063. Given that the Commission accepted the need for the DCC/SCADA project, the
Commission considers that this project will satisfy the requirements of Criterion 2, if it
441
442
Exhibit 63, application, Table 1 on page 14.
Decision 2013-435, paragraph 329.
126 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
can be demonstrated, based on a project net cost analysis, that it is not adequately funded
under the I-X mechanism…443
529. Fortis indicated that, in Appendix B of the application, it demonstrated that the
DCC/SCADA project is not adequately funded under the I-X mechanism using the project net
cost approach and, therefore, satisfies the requirements of Criterion 2.444
Commission findings
530. In Decision 2013-435, the Commission determined that Fortis’ externally driven projects
or programs (AESO Contributions program, Substation Associated Upgrades program, and
Distribution Line Moves program) are required by an external party and, therefore, satisfy the
requirements of Criterion 2.445 As set out in Section 3 of this decision, the Commission considers
that, for the purposes of the true-up of the 2013 capital tracker projects or programs for which the
Commission undertook the assessment against the Criterion 2 requirements in Decision
2013-435, unless the driver for the project or program has changed, there is no need to undertake
a reassessment against the Criterion 2 requirements.
531. In the 2013-2015 capital tracker application, Fortis indicated that the driver for the three
externally driven programs (AESO Contributions program, Substation Associated Upgrades
program, and Distribution Line Moves program) did not change since Decision 2013-435 so as
to warrant a reassessment under Criterion 2. The Commission finds that these 2013 programs
continue to satisfy the requirements of Criterion 2.
532. In subsequent capital tracker true-up applications, the Commission directs Fortis to
address whether the driver for any of the previously approved forecast projects or programs has
changed, so as to warrant a reassessment under Criterion 2. In the event that the driver of the
project or program has changed since the forecast project or program was approved, Fortis is
directed to identify such projects and programs and to provide evidentiary support that each
project or program continues to satisfy the requirements of Criterion 2.
533. The Commission has reviewed the evidence and the reasons provided by Fortis for its
projects in 2013 not previously evaluated in Decision 2013-435, and for the forecast capital
projects for 2014 and 2015 proposed for capital tracker treatment, as summarized in Table 41
above. With the exception of the DCC/SCADA project, the Commission finds that the driver for
each of Fortis’ proposed capital tracker projects and programs falls into one of the following
Criterion 2 categories: asset replacement or refurbishment; required by an external party; or
growth related.
534. The DCC/SCADA project is an example of a capital tracker project that does not
precisely fit into any of the three Criterion 2 categories (asset replacement, externally driven, and
growth-related). Given that the Commission accepted the need for the DCC/SCADA project in
Decision 2013-435, this project will satisfy the requirements of Criterion 2, if it can be
demonstrated, based on a project net cost analysis, that it is not adequately funded under the I-X
443
444
445
Decision 2013-435, paragraph 1063.
Exhibit 63, application, paragraph 33.
Decision 2013-435, paragraphs 1029, 1030, 1035, 1042 and 1061.
Decision 3220-D01-2015 (March 5, 2015) • 127
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
mechanism.446 Fortis provided this analysis in Appendix B of the 2013-2015 capital tracker
application.447
535. For the above reasons, the Commission finds that each of Fortis’ projects or programs
presented in Table 41 satisfies the requirements of Criterion 2.
10
Criterion 3 – the project must have a material effect on the company’s finances
536. Section 8 of this decision addressed Fortis’ accounting test, which determines whether all
of the forecast or actual expenditures for a capital project are, or a portion is, outside the normal
course of the company’s ongoing operations, as required to satisfy Criterion 1. This is
established by demonstrating that the associated revenue provided under the I-X mechanism
would not be sufficient to recover the entire revenue requirement associated with the prudent
capital expenditures for the program or project proposed for capital tracker treatment.
537. In accordance with the Commission determinations in Decision 2013-435, the portion of
the revenue requirement for a project or program proposed for capital tracker treatment that is
not funded under the I-X mechanism in a PBR year, calculated as part of the accounting test, is
then assessed against the two-tiered materiality test under Criterion 3. The first tier of the
materiality threshold, a “four basis point threshold,” is applied at a project level (grouped in the
manner approved by the Commission). The second tier of the materiality threshold, a “40 basis
point threshold,” is applied to the aggregate revenue requirement proposed to be recovered by
way of all capital trackers.448
538. In Decision 2013-435, the Commission calculated the four basis point threshold and the
40 basis point threshold based on a respective dollar value of Fortis’ ROE in 2012. The
Commission indicated that in subsequent PBR years, the four basis point threshold and the 40
basis point threshold are to be calculated by escalating the dollar value of the respective amount
in 2012 by I-X.449
539. For 2013, the Commission approved a four basis point threshold of $330,000 and a 40
basis point threshold of $3.356 million for Fortis.450 In this application, Fortis calculated the 2014
and 2015 materiality thresholds following the methodology set out in Decision 2013-435.
Specifically, Fortis calculated the 40 basis point materiality threshold to be $3.409 million for
2014 and 3.464 million for 2015. Fortis calculated the four basis point threshold to be $0.341
million and $0.347 million, for 2014 and 2015, respectively.451 Fortis indicated that:
Schedules 8, 10 and 12 of Appendix B show that each of FortisAlberta’s Capital Trackers
surpasses the four basis point threshold individually. Schedule 1 of Appendix B shows
that the total capital tracker amount in each year surpasses the 40 basis point threshold at
an aggregate revenue requirement level.452
446
447
448
449
450
451
452
Decision 2013-435, paragraph 1063.
Exhibit 61, Appendix B.
Decision 2013-435, paragraphs 382-385.
Decision 2013-435, paragraphs 378 and 384.
Decision 2013-435, paragraph 385 and Table 8 at page 88.
Exhibit 63, application, paragraph 88.
Exhibit 63, application, paragraph 35.
128 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
540. The UCA noted that it had recommended reductions to several K factor amounts.453 The
UCA recommended that the Criterion 3 materiality test be redone in the compliance filing.454 The
CCA submitted that the materiality test would no longer be met in some cases after the
adjustments which it proposed.455 The interveners did not otherwise address Criterion 3 in their
respective evidence or argument.
Commission findings
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 2013.456 For the purpose of the
2013 capital tracker true-up, Fortis is directed to use these approved materiality thresholds.457
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.
543. For 2015, Fortis calculated the first and second tier materiality thresholds by escalating
the respective 2012 values by the approved 2013 and 2014 I-X indexes, and then the estimated
2015 I-X index value. As discussed in Section 8.2, given that Fortis did not have an approved
I factor for 2015 when it filed this 2013-2015 capital tracker application, it used the approved
2014 I factor of 2.75 per cent as a placeholder for its 2015 I factor. The Commission accepts, in
principle, the use of such forecasting methods when the final approved numbers are not
available.
544. At the same time, consistent with the findings in Section 8.2, the Commission considers
that the calculation of the first and second tier materiality thresholds for purposes of the capital
tracker true-up application for a given year should be based on the approved I-X index for that
year. The Commission directs Fortis to follow this approach in future capital tracker true-up
applications.
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.
546. The Commission has reviewed Fortis’ calculations, and is generally satisfied that it has
interpreted the Criterion 3 test properly and has applied the test properly. However, as discussed
earlier in this section, the two-tiered materiality test under Criterion 3 is applied to the portion of
the revenue requirement for a project or program proposed for capital tracker treatment that is
not funded under the I-X mechanism in a PBR year, calculated in the accounting test. In Section
8.4, the Commission directed Fortis, in its compliance filing to this decision, to revise its
accounting test based on approved actual or forecast capital additions and model assumptions.
Accordingly, because Fortis’ accounting test for each of 2013, 2014 and 2015 needs to be
453
454
455
456
457
Exhibit 3220-X0003, UCA argument, paragraphs 42-44.
Exhibit 82.02, UCA evidence, paragraph A16.
Exhibit 81.01, CCA evidence, page 14.
Decision 2013-435, paragraph 385 and Table 8 at page 88.
Decision 2013-435, paragraph 385 and Table 8 at page 88.
Decision 3220-D01-2015 (March 5, 2015) • 129
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
revised, the Commission cannot determine in this decision whether any of Fortis’ projects or
programs proposed for capital tracker treatment in the periods from 2013 to 2015 satisfy the
materiality test requirement of Criterion 3.
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.
11
Other matters
11.1
Controls and accountability
548. During the oral hearing, Fortis was questioned by Commission counsel on its internal
controls and accountability mechanisms with respect to quality, safety and cost for capital
projects approved for capital tracker treatment, and whether these controls and mechanisms are
any different than the measures put in place for capital projects that have not been afforded
capital tracker treatment. In its response, Fortis elaborated on the summary that it had provided
in its application with respect to the methods it has adopted to minimize the level of capital
expenditures for all its programs. Fortis also reviewed its internal control procedures for tracking
and mitigating cost overruns and confirmed that there were no differences in how these
procedures were applied among its capital projects.
549. Fortis also added that directors in the company who are responsible for establishing
capital budgets have annual performance targets that incorporate delivering those projects on
budget. So there are some consequences for those directors who cannot deliver their overall
programs on budget.458
Commission findings
550. PBR encourages a company to seek out and realize gains in process, operational and
capital productivity continually with respect to those functions and activities funded under the IX mechanism, in order to enhance overall profitability. These activities will in turn benefit
ratepayers immediately through the X factor and over the longer term through lower costs than
might otherwise be the case. Capital projects funded through capital tracker treatment with a
true-up to actual costs are not, however, subject to the same incentives. Accordingly, the
Commission requires sufficient information in capital tracker forecast and true-up applications
on the proposed capital tracker projects themselves, as well as the processes in place to manage
those projects, in order to confirm the need for the project in the manner that is proposed, and to
ensure the prudence of the costs incurred. The Commission considers that formal project
management policies and procedures are necessary to ensure the Commission understands that
the scope, level, timing and costs of forecast capital projects are reasonable and actual costs have
been prudently incurred. The Commission directs Fortis to describe fully its formal project
management policies and procedures in its next capital tracker application.
458
Transcript, Volume 2, page 148, lines 17-24 (Mr. Lorimer).
130 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
11.2
FortisAlberta Inc.
Rule 005: reporting of returns
551. In the hearing, the CCA raised concerns about the annual financial reporting of returns in
the Rule 005459 filings. The CCA opined that in the interests of regulatory efficiency, Fortis
should be required to restate its Rule 005 results, which have been filed on an interim basis in
this proceeding, after the final capital tracker results are known.460 This will ensure that the trueup is allocated to the appropriate year, which is especially important in light of the fact that the
PBR plan has reopener provisions that depend upon return on equity results. The CCA also
recommended that the Rule 005 information should distinguish I-X information from capital
tracker information. This would be consistent with PBR principle 3, which states that the plan
should be easy to understand because this will enable parties to easily understand all aspects of
the plan and, in particular, the grouping of components, assets and projects into capital tracker
programs. The CCA concluded by saying, “the CCA is not talking about testing I-X capital and
O&M expenses, but simply proposing that Rule 005 segregate capital tracker from non-capital
trackers as well as its consequential impacts.”461
552. In its argument, Fortis submitted that the actual effect of capital trackers on returns
cannot be accurately calculated until the true-up effect on approved capital trackers is known and
so, if an updated Rule 005 report is to be required, it should be one that is definitively accurate,
and not just an estimate, subject to further change.462
Commission findings
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.
554. Further, the Commission has established Proceeding 3558,463 that will address the
minimum filing requirements for capital tracker applications, including how actual capital
additions should be reflected in future capital tracker applications and true-up applications.
11.3
555.
Minimum capitalization threshold
In argument the CCA submitted that:
Fortis has a capitalization threshold of $300 for fixed asset. Fortis does not index this threshold
for inflation. …without indexing the threshold for what is deemed capital versus non-capital, a
slow but inexorable shift of costs from non-capital tracker to capital tracker will occur. This is
because in real, deflated terms the threshold for capitalization will decrease each year.464
556.
459
460
461
462
463
464
In reply argument, Fortis submitted that:
Rule 005: Annual Reporting Requirements of Financial and Operational Results.
Exhibit 3220-X0004, CCA argument, paragraph 210.
Exhibit 3220-X0004, CCA argument, paragraph 214.
Exhibit 3220-X0001, Fortis argument, paragraph 197
Proceeding 3558, Commission-initiated Proceeding to Consider Modifications to the Minimum Filing
Requirements for Capital Tracker Applications.
Exhibit 3220-X0004, CCA argument, paragraph 216.
Decision 3220-D01-2015 (March 5, 2015) • 131
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
The CCA also errs when it proclaims that FortisAlberta has a capitalization threshold of
$300 for fixed assets. …FortisAlberta follows the appropriate IAS standard and
capitalizes an expenditure if it is capital in nature and if it is not onerous to do so,
regardless of the amount.465
Commission findings
557. The Commission notes that the CCA did not provide a reference for the $300 figure and
that Fortis indicated that it does not have a specific capitalization dollar level threshold. The
Commission rejects the CCA’s proposal to index Fortis’ capitalization threshold amount because
the CCA’s understanding appears to be in error.
11.4
Requirement that in the absence of the proposed capital expenditures,
deterioration in service quality and safety would result
558. In Decision 2012-237, the Commission stated the following regarding the first capital
tracker criterion:
594.
… This criterion is also required to ensure that capital tracker projects are of
sufficient importance that the company’s ability to provide utility service at adequate
levels would be compromised if the expenditures are not undertaken. Projects that do not
carry this level of importance are likely subject to a reasonable level of management
discretion, therefore allowing special treatment for this type of capital would eliminate
the incentive for the company to examine all alternatives. Therefore, this criterion would
require that an engineering study be filed to justify the level of capital expenditures being
proposed. That is, the company must demonstrate that the capital expenditures are
required to prevent deterioration in service quality and safety, and that service quality and
safety cannot be maintained by continuing with O&M and capital spending at levels that
are not substantially different from historical levels...466 [footnote omitted]
559. In Decision 2013-435, the Commission further elaborated on Criterion 1 requirements
and determined that for the purpose of the project assessment, in support of a project or program
proposed for capital tracker treatment, a company should provide, among other requirements:
1092. …
c.
Evidence demonstrating that in the absence of the proposed capital expenditures,
deterioration in service quality and safety would result.467
560. In its argument, the UCA pointed to Fortis’ statement that for “certain programs, the
deterioration in service quality and safety wouldn't result in a specified calendar year…”468 In this
regard, the UCA submitted it interprets paragraph 1092(c) in Decision 2013-435 as requiring
evidence “demonstrating that in the absence of the proposed capital expenditures, deterioration
in service quality and safety would result” in the year for which capital tracker treatment is
sought. The UCA noted that capital trackers are applied for on an annual basis, rather than over a
specified period. Therefore, in the UCA’s view, “the logical conclusion is that the requirements
465
466
467
468
Exhibit 3220-X0005, Fortis reply argument, paragraph 113.
Decision 2012-237, paragraph 594.
Decision 2013-435, paragraph 1092 c.
Transcript, Volume 2, page 268, lines 22-24 (Mr. Eck).
132 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
set out in paragraph 1092 of Decision 2013-435 speak to the applicable year for which the capital
tracker is sought, rather than some indeterminate future time.”469
561. During the hearing, the UCA’s witness, Mr. Shymanski, commented on this issue as
follows:
The K factor calculations aren’t set up for, I don’t believe, for a 2013 to 2017 period or a
2013 to a 2021 period. There are specific calculations done for each and every year, so
there are demonstrations required in each and even’ year. At least that’s the way I’m
reading the decision. It isn’t something over a five- or ten-year period that they have to
demonstrate there’s deterioration in service.470
562. Fortis did not agree with the UCA’s interpretation. During the hearing, Mr. Eck for Fortis
indicated that in paragraph 1092(c) in Decision 2013-435, “the Commission simply stated we
had to show evidence that service quality won't deteriorate or see if the risk occur. No time was
specified.”471 Mr. Eck also stated that although it is possible to defer certain capital expenditures
in the short term without an immediate deterioration of service quality and safety, as
demonstrated by Fortis’ deferral of capital expenditures in 2013, such deterioration may result in
the long term. Mr. Eck commented further as follows:
MR. ECK: When we looked at our capital expenditure programs in 2013, even the
uncertainty as it pertains to the nature and extent of the capital tracker treatment, we
assessed our discretionary capital programs and we reviewed ones that are low risk,
meaning that the service quality and safety risks won't be impacted immediately. Based
on that assessment, we deferred certain projects within our programs.
On a long-term basis, we knew, based on our previous history, based on our previous
practices and so forth, that service quality and safety risk will occur in the long term. But
we looked at the ones where the impact won't be immediate in the short term, and that's
how we made the determination to defer certain capital projects programs.472
563.
Mr. Lorimer provided further comments on this matter:
MR. LORIMER: It was our interpretation of how we should look at that particular aspect
of 1092. Not that we were having difficulties with it, but for certain types of capital, we
have to look at it with a broader view than just proving in that year we've seen a specific
deterioration in service.
We can show that they are very required expenditures and have been shown to be that by
the rationale for the projects as have been discussed in past DTAs as well as the business
cases associated with this application, but we wouldn't want to not do the work in order to
prove it's required for capital tracker treatment.
We think the proper approach is to do the necessary work based on the rationales we've
put forward because we have, I believe, given good comfort around the appropriateness
of the programs over the long term and have justified over the long term the need for
these programs to maintain service quality.473
469
470
471
472
473
Exhibit 3220-X0003, UCA argument, paragraph 39.
Transcript, Volume 4, page 747, lines 16-23 (Mr. Shymanski).
Transcript, Volume 2, page 270, lines 9-12 (Mr. Eck).
Transcript, Volume 2, page 270, line 24 to page 271, line 14 (Mr. Eck).
Transcript, Volume 2, page 287, line 23 to page 288, line 16 (Mr. Lorimer).
Decision 3220-D01-2015 (March 5, 2015) • 133
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Commission findings
564. The Commission does not agree that the requirement under Criterion 1 specified in
paragraph 1092 c. of Decision 2013-435 should be interpreted so as to require the company to
provide evidence demonstrating that, in absence of the capital expenditures associated with a
proposed capital tracker project, deterioration in service quality and safety would necessarily
result “in the year for which capital tracker treatment is sought,” as recommended by the UCA.474
For the reasons below, the Commission considers that the UCA’s interpretation is too restrictive
in the circumstances of most capital replacement and upgrade programs intended to maintain
system reliability and safety.
565. Fortis submitted that “[m]anagement of capital programs is not so short term in focus, not
so black and white.”475 Capital projects typically involve the construction of long-lived assets,
that provide service to customers for many years. As such, requiring the company to demonstrate
that, in the absence of the capital expenditures for a capital tracker project, deterioration in
service quality and safety would result “in the year for which capital tracker treatment is sought”
does not comport, in most instances, with the long-lived nature of capital assets. The
Commission agrees with Mr. Eck that, while there might not be an easily quantifiable, direct and
immediate effect of not completing the project in a specific year at a reasonable cost, not
proceeding with the project will result in a deterioration in reliability over time.476
566. Furthermore, a requirement that deterioration in service quality and safety would result
“in that year” may prevent the company from selecting the best course of action, including the
best timing, to achieve the least cost alternative for a particular capital tracker project. As a
result, the company is charged with presenting evidence that the scope, level and timing of the
proposed capital tracker program is prudent in the year for which capital tracker treatment is
sought and that the forecast costs are reasonable for that year. This evidence must compellingly
demonstrate that the planned capital tracker activities are necessary in the year for which capital
tracker treatment is sought in order to maintain system reliability and safety and that in the
absence of the proposed capital expenditures, deterioration in service quality and safety would
result either in that year or over a reasonably foreseeable period of time.
11.5
2012 actual capital additions in the 2013 K factor calculation
567. In his evidence, Mr. Shymanski, on behalf of the UCA, observed that Fortis, in
calculating the 2013 K factor amount associated with its projects or programs proposed for
capital tracker treatment, relied on the 2012 actual, rather than the approved forecast capital
additions. Mr. Shymanski raised the following as an issue:
FAI has proposed to include actual capital additions from 2012 for projects that were not
completed in 2012 as part of the 2013 Capital Tracker true-up. This selective approach to
truing up the capital related revenue requirement was rejected by the AUC in Decision
2012-237 and, as such, should not be allowed in this proceeding. Any actual capital
additions from 2012 that have been included in this application as part of the K Factor
calculations should be excluded from the K Factor calculation because the AUC has
already ruled on the inclusion of 2012 actuals in PBR. I recommend that these capital
additions be removed from the 2013 Capital Tracker.477
474
475
476
477
Exhibit 3220-X0003, UCA argument, paragraph 39.
Exhibit 3320-X0001, Fortis argument, paragraph 175.
Transcript, Volume 2, page 270, line 24 to page 271, line 14 (Mr. Eck).
Exhibit 82.02, Mr. Shymanski evidence for the UCA, page 3.
134 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
568. In Mr. Shymanski’s view, including the 2012 actual capital additions in the 2013 K factor
calculation is inconsistent with the Commission’s determinations in Decision 2012-237 that the
companies’ going-in rates should be based on the “2012 approved rates [i.e., approved on a
forecast basis in cost of service proceedings prior to the onset of PBR] rather than 2012 actual
costs” and that “adjustments to going-in rates should not be made to reflect actual results.” The
Commission also stated in that decision that “adjustments should not be made selectively but,
rather, should only be made in the context of a full rate case.”478
569. Mr. Shymanski expressed his concern that by including the 2012 actual capital additions
in the 2013 K factor calculation, Fortis:
… has created the potential effect that for projects that were included in 2012 going-in
rates which customers paid for in their rates, FAI is now also including these same
projects again as part of the K Factor calculation. In effect, they are potentially getting a
double up of cost recovery. Because the going-in rates will remain in effect, with the I –
X applied to them, for the period of the PBR term, any adjustment to rates to “adjust” any
double-counting will only be done at the end of the PBR.479
570. In addition, Mr. Shymanski stated that since the 2012 projects were initiated prior to the
commencement of PBR in 2013, they should not now form part of the K factor calculation.
During the hearing and in the UCA’s argument, Mr. Shymanski went on to explain that, from his
perspective, the 2012 actual capital additions that were not included in the 2012 going-in rates
could be applied for inclusion in the K factor amount, but this would require a separate capital
tracker application demonstrating the 2012 actual capital additions had met all three criteria for
capital trackers.480 In argument, the UCA supported the view of Mr. Shymanski and submitted
that the 2013 capital tracker application “should focus only on projects expected to start and be
completed in 2013.”481
571.
As a result of the above considerations, Mr. Shymanski recommended:
With respect to the 2013 Capital Tracker True-up and K Factor calculations, I
recommend that the AUC direct FAI in its compliance filing to the decision on this
application to list all projects that are carry-over projects that were not started in 2012 but
deferred to 2013 and for which FAI is requesting K Factor status for 2013. Based on my
evidence, I recommend that these projects be removed from the K Factor calculation for
2013.482 [footnote omitted]
572. The UCA, in its argument, supported this recommendation. However, rather than just
focusing on “carry-over projects that were not started in 2012 but deferred to 2013,” as did
Mr. Shymanski in his recommendation, the UCA submitted that “to the extent that any 2012
actual capital additions included by FAI in its Capital Tracker were already accounted for in its
478
479
480
481
482
Decision 2012-237, paragraph 88.
Exhibit 82.02, Mr. Shymanski evidence for the UCA, page 3.
Transcript, Volume 4, page 723, lines 8-22 (Mr. Shymanski) and Exhibit 320-X0003, UCA argument,
paragraph 23.
Exhibit 3220-X0003, UCA argument, paragraph 25.
Exhibit 82.02, Mr. Shymanski evidence for the UCA, page 9.
Decision 3220-D01-2015 (March 5, 2015) • 135
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
2012 going-in rates, those 2012 actuals should be removed from the K Factor calculation for
2013.”483
573. Alternatively, if the Commission determines that the 2012 capital expenditures should be
included in the 2013 K factor calculations, Mr. Shymanski recommended the revenue
requirement effect of these capital expenditures be removed from the 2012 going-in rates.484
However, Mr. Shymanski speculated that this approach seems inconsistent with the
Commission’s findings in Decision 2012-237 regarding the adjustments to going-in rates. The
UCA reiterated these concerns in its argument.
574. In its rebuttal evidence, Fortis indicated that capital tracker parameters and K factor
calculations are separate matters from updating the going-in rates. Fortis pointed out that in
Decision 2013-435, the Commission maintained the application of the mid-year convention for
capital tracker projects.485 Fortis went on to explain:
… FortisAlberta’s 2012 Going-in Rates were established by a Commission decision, just
as were going-in rates for all other PBR utilities. And, just as with all other PBR utilities,
actual capital additions in 2012 and in 2013 are the basis of mid-year convention
calculations for capital tracker purposes. Projects that are capital trackers (for 2013) are
calculated based on a comparison of actual mid-year 2012 to actual mid-year 2013 costs.
Indeed, this is the method used and approved for both EDTI and AUI. 486
575. In its reply argument, Fortis submitted that the accounting test, based on the project net
cost approach ensures there is no duplication of costs between those included in going-in rates
and those seeking capital tracker treatment. Fortis pointed out that for all capital tracker projects,
the going-in rate levels reflect only the mid-year 2012 capital additions amounts. Therefore,
according to Fortis, using mid-year 2013 for capital tracker purposes is proper continuity, not
duplication.
… there could potentially be differences between what the 2012 mid-year capital
additions for a project in going-in rates was forecast to be in the determination of goingin rates, versus what the actual turned out to be, but that is inherent for all utilities in the
determination made by the Commission to base 2013 capital trackers on actual capital
additions reflecting the mid-year convention. This is not a shortcoming of the PBR
regime, but rather the continuation of what had been the case under cost of service (COS)
regulation. Under COS ratemaking, a capital additions forecast was used for any given
test year in the determination of rate base using the mid-year convention. Rates, as
subsequently set, were based on the actual capital additions.487
Commission findings
576. The concern expressed with respect to the use of the 2012 actual capital additions in the
2013 K factor calculations centered on the fact that by “including 2012 actual capital addition
costs in its K Factor calculations that were already accounted for in its 2012 going in rates,”
Fortis could achieve “double recovery of those costs.”488 The issue of avoiding such “double
483
484
485
486
487
488
Exhibit 3220-X0003, UCA argument, paragraph 31.
Exhibit 82.02, Mr. Shymanski evidence for the UCA, page 9.
Decision 2013-435, paragraphs 423-426.
Exhibit 99.02, Fortis rebuttal evidence, paragraph 107.
Exhibit 3220-X0005, Fortis reply argument, paragraph 9.
Exhibit 3220-X0003, UCA argument, paragraph 20.
136 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
recovery” was squarely before the Commission when designing the capital tracker mechanism as
a means of addressing capital under PBR.
577. In Decision 2012-237, the Commission noted that the “inclusion of capital trackers in the
PBR plan presents a potential for double-counting if capital costs that should be funded by the
I-X mechanism are also funded by the revenue provided through a capital tracker.”489 The
Commission determined that in order for a project to qualify for capital tracker treatment, the
companies must demonstrate that no double-counting occurs between capital related costs that
should be funded by way of a capital tracker and those that should be funded under the I-X
mechanism.490
578. In Decision 2013-435, the Commission further considered these issues and determined
that a project net cost approach “adequately demonstrates that a specific project proposed for
capital tracker treatment does not result in double-counting, as required to satisfy Criterion 1.”491
Specifically, as set out in Section 4.4 of Decision 2013-435, the accounting test, as it relates to
revenue calculations, consists of two components. The first component is the revenue provided
under the I-X mechanism for a project or program proposed for capital tracker treatment. The
second component is the revenue requirement calculations based on the forecast or actual capital
additions for that project or program for the PBR year. The Commission provided further
explanation on the first and second component of the accounting test in Decision 3434-D012015:
15.
The first component of the accounting test uses the rate base, on a project-byproject or program-by-program basis, that was included in a company’s PBR going-in
rates. The depreciation expense, return on rate base and tax implications are then
calculated to determine the going-in revenue requirement on a project-by-project or
program-by-program basis that is included in the going-in rates. This amount is escalated
by the I-X mechanism each year to determine the amount of revenue associated with each
project or program that is provided by the PBR formula. Similarly, the second component
of the accounting test calculates the revenue requirement, including depreciation expense,
return on rate base and tax implications, on a project-by-project or program-by-program
basis; however, the second component calculates amounts associated with the actual rate
base for the company for each PBR year. Because the second component of the
accounting test uses the actual rate base for a company, it is not escalated by the I-X
mechanism each year. …492
579. As further set out in Decision 2013-435, for the purpose of the K factor calculation, to
determine the portion of the revenue requirement for a project or program proposed for capital
tracker treatment that is not funded under the I-X mechanism in a PBR year, the amount
provided under the I-X mechanism for that project or program is subtracted from the forecast or
actual revenue requirement for that project or program for the PBR year. As such, any overlaps
in the revenue requirement that result from projects that were in the going-in rates (as reflected in
the first component of the accounting test) and are also in the actual revenue requirement (as
reflected in the second component of the accounting test) are going to cancel one another out.
Therefore, the Commission agrees with Fortis’ view493 that the accounting test, based on the
489
490
491
492
493
Decision 2012-237, paragraph 602.
Decision 2012-237, paragraph 594.
Decision 2013-435, paragraph 196.
Decision 3434-D01-2015, paragraph 15.
Exhibit 3220-X0005, Fortis reply argument, paragraph 8.
Decision 3220-D01-2015 (March 5, 2015) • 137
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
project net cost approach, ensures there is no double recovery of capital costs that should be
funded by way of a capital tracker and those that should be funded under the I-X mechanism
(which is applied to the going-in rates).
580. Further, in Decision 2013-435, the Commission upheld the application of the mid-year
convention for capital tracker projects. As such, the 2013 revenue requirement calculation for
capital tracker projects is based on the mid-year calculation based on 2012 actual year-end
capital additions and 2013 forecast year-end capital additions. As Fortis pointed out,
This is not a shortcoming of the PBR regime, but rather the continuation of what had
been the case under cost of service (COS) regulation. Under COS ratemaking, a capital
additions forecast was used for any given test year in the determination of rate base using
the mid-year convention. Rates, as subsequently set, were based on the actual capital
additions.494
581. The Commission does not agree with Mr. Shymanski’s view that using the 2012 actual
capital additions in the 2013 K factor calculations is inconsistent with the Commission’s
determinations in Decision 2012-237 that “adjustments to going-in rates should not be made to
reflect actual results.”495 As Fortis explained, capital tracker parameters (including the use of the
mid-year convention) and K factor calculations are separate matters from updating the going-in
rates.496 During the hearing, Mr. Shymanski acknowledged that his recommendation effectively
means that the mid-year convention would not be applied for capital tracker projects started, but
not finished, in 2013:
Q. So, sir, you're saying that if there was a project that was started in 2012, did not get
finished, as many projects do -- that's why CWIP [construction work in progress] exists -was completed in 2013, becomes a 2013 capital addition, your suggestion is the normal
application of the midyear convention for capital tracker purposes would not be applied?
A. No, it wouldn't. I believe paragraph 425 talks to that issue in terms of how to deal with
it, in terms of the midyear convention.497
582. The Commission does not accept Mr. Shymanski’s and the UCA’s recommendation that
“any 2012 actual capital additions included by FAI in its Capital Tracker were already accounted
for in its 2012 going in rates, those 2012 actuals should be removed from the K Factor
calculation for 2013.”498 As well, the Commission does not share Mr. Shymanski’s view,
supported by the UCA, that including the 2012 actual capital additions that were not included in
the 2012 going-in rates in the 2013 K factor amount would require a separate capital tracker
application demonstrating the 2012 actual capital additions met all three criteria for capital
trackers.499
583. The Commission considered how to deal with 2012 actual capital additions under the
capital tracker mechanism in Decision 2013-435 and stated:
494
495
496
497
498
499
Exhibit 3220-X0005, Fortis reply argument, paragraph 9.
Decision 2012-237, paragraph 88.
Exhibit 99.02, Fortis rebuttal evidence, paragraphs 104 and 107.
Transcript, Volume 4, page 725, lines 12-21 (Mr. Shymanski).
Exhibit 3220-X0003, UCA argument, paragraph 31.
Transcript, Volume 4, page 723 lines 8-22 (Mr. Shymanski) and Exhibit 3220-X0003, UCA argument,
paragraph 23.
138 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
424.
The Commission considers that maintaining the mid-year convention in
combination with the accounting test discussed in sections 3.1.2 and 3.1.3 of this
decision, is sufficient to demonstrate whether the I-X mechanism provides sufficient
revenue to recover the 2013 revenue requirement for capital projects with additions
incurred in 2012 that were not fully recognized in the 2012 going-in rates due to the midyear convention. This is because half of the costs for capital projects not accounted for
under the mid-year convention in 2012 will be accounted for in the accounting test under
the project net cost approach when the 2013 forecast revenue requirement is calculated
using the mid-year convention.
425.
Therefore, any costs incurred for a capital project in 2012 will be considered for
capital tracker treatment, if it can be demonstrated, using the mid-year convention in
combination with the accounting test described in sections 3.1.2 and 3.1.3 of this
decision, that the associated 2013 revenue requirement is not adequately funded under the
I-X mechanism, and the project satisfies the balance of the Commission’s three criteria.
584. Finally, the Commission does not agree with the UCA’s interpretation that the 2013
capital tracker application “should focus only on projects expected to start and be completed in
2013.”500 The UCA’s interpretation would exclude from capital tracker treatment all multi-year
capital projects. This was not the Commission’s intent in Decision 2013-435. The incorporation
of existing regulatory mechanisms for dealing with multi-year capital projects such as CWIP,
AFUDC and the mid-year convention, ensure the continuity of treatment of multi-year projects
between cost-of-service regulation and PBR.
12
K factor calculation
585. In Decision 2013-435, the Commission did not extend capital tracker treatment to any of
Fortis’ projects or programs proposed for 2013 on a forecast basis. The Commission determined
that Fortis would retain a 60 per cent placeholder based on the 2013 applied-for forecast K factor
amount on an interim basis.501 The 60 per cent placeholder resulted in an interim K factor for
2013 of $14.6 million, which was originally approved in Decision 2013-072.502 In the current
application, Fortis calculated an actual 2013 K factor of $23.2 million, as shown in Table 1 from
Section 4 of this decision.
586. As summarized in Table 1 from Section 4 of this decision, Fortis calculated the 2014 and
2015 forecast K factors to be $48.1 million and $68.9 million, respectively. In Decision
2013-464, the Commission approved a K factor placeholder of $29.2 million, representing some
60 per cent of a preliminary estimate of the applied-for amount, to be included in Fortis’ 2014
PBR rates.503 In Decision 2014-351, the Commission approved a K factor placeholder of
$62.0 million, equal to 90 per cent of the proposed 2015 K factor, to be included in Fortis’ 2015
PBR rates.504
500
501
502
503
504
Exhibit 3220-X0003, UCA argument, paragraph 25.
Decision 2013-435, paragraph 1068.
Decision 2013-072, Table 1.
Decision 2013-464, paragraphs 47 and 59.
Decision 2014-351, paragraph 39.
Decision 3220-D01-2015 (March 5, 2015) • 139
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Commission findings
587. In Section 7, the Commission confirmed the prudency of actual capital additions
associated with most of Fortis’ capital tracker projects or programs in 2013, 2014 and 2015,
subject to its determinations on the capitalized overhead amounts applied to the capital tracker
projects and programs, as discussed in Section 7.1.2. Additionally, in Section 7.2.7 the
Commission directed Fortis to make changes to its Worst Performing Feeders program and in
Section 7.2.8 the Commission directed Fortis to adjust its forecast for the Pole Management
program. As a result, as set out in sections 8.4 and 10 of this decision, the Commission directed
Fortis, in its compliance filing to this decision, to revise its accounting test assessment under
Criterion 1 and the two-tiered materiality test assessment under Criterion 3. Because these
revisions will result in changes to the 2013 actual K factor amount and the 2014 and 2015
forecast K factor amounts, the Commission cannot approve any 2013, 2014 or 2015 K factor
adjustments for Fortis in this decision.
588. Nevertheless, the Commission has reviewed Fortis’ calculations and finds that Fortis’
K factor calculation methodology is generally consistent with the requirements set out in
Decision 2012-237 and Decision 2013-435.
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.
140 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
13
590.
FortisAlberta Inc.
Order
It is hereby ordered that:
(1)
FortisAlberta Inc. is directed to file a compliance filing application in accordance
with the directions contained within this decision on April 14, 2015.
Dated on March 5, 2015.
Alberta Utilities Commission
(original signed by)
Mark Kolesar
Vice-Chair
(original signed by)
Neil Jamieson
Commission Member
(original signed by)
Henry van Egteren
Commission Member
Decision 3220-D01-2015 (March 5, 2015) • 141
2013-2015 Capital Tracker Application
FortisAlberta Inc.
Appendix 1 – Proceeding participants
Name of organization (abbreviation)
counsel or representative
FortisAlberta Inc.
Davis LLP
ATCO Electric Ltd.
AltaLink Management Ltd.
ATCO Gas
AltaGas Utilites Inc.
Consumers’ Coalition of Alberta (CCA)
EPCOR Distribution & Transmission Inc.
Office of the Utilities Consumer Advocate (UCA)
Brownlee LLP
Alberta Utilities Commission
Commission panel
M. Kolesar, Vice-Chair
N. Jamieson, Commission Member
H. van Egteren, Commission Member
Commission staff
B. McNulty (Associate general counsel)
S. Allen
B. Miller
N. Mahbub
O. Vasetsky
P. Genderka
Decision 3220-D01-2015 (March 5, 2015) • 143
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Appendix 2 – Oral hearing – registered appearances
Name of organization (abbreviation)
counsel or representative
Witnesses
FortisAlberta Inc.
T. Dalgleish, QC
I. Lorimer
C. Eck
R. Bahry
Consuemrs’ Coalition of Alberta (CCA)
J. Wachowich
J. Thygesen
Office of the Utilities Consumer Advocate (UCA)
T. Marriott
M. Paul
B. Shymanski
Alberta Utilities Commission
Commission panel
M. Kolesar, Vice-Chair
N. Jamieson, Commission Member
H. van Egteren, Commission Member
Commission staff
S. Boyd (Commission counsel)
S. Allen
N. Mahbub
O. Vasetsky
P. Genderka
144 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
Appendix 3 – 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 grouping of the Distribution Capacity Increases program, which is made up of four
subprograms, Capacity Increases projects, System Improvements, System Neutrals and
Line Loss Reduction, is accepted for the purpose of this decision because this grouping is
consistent with past practices of Fortis. The Commission understands that Fortis has
grouped the distribution capacity increases program in the manner that it has because “all
these programs are triggered from [its] distribution planning functions where they
actually have an overview of the entire system, and they plan the system.” The
Commission considers that regardless of the function within the company that originates
the subprograms, the subprograms may not be sufficiently similar to one another to
justify maintaining this grouping for capital tracker purposes. For example, projects to
address line losses appear to have different driver (i.e., to reduce line losses) than projects
that are required for capacity increases (i.e., to accommodate customer growth).
Accordingly, Fortis is directed to reassess, in its next capital tracker application, the
grouping of the distribution capacity increases program, and the possibility of
disaggregating this program. Fortis should fully explain the reasons for its decision to
maintain the present grouping or to disaggregate the program. ....................... Paragraph 86
2.
In its accounting test, Fortis included several different groupings that are related to
metering. These include the automated meter project, metering unmetered oilfield project
and a separate category called “metering & other,” which itself is composed of metering,
conventional meters, automated meters in stores, and system purchases. The
Commission accepts that Fortis has historically separated its metering capital additions
into these categories, and is, therefore, willing to accept these groupings for the purpose
of this decision. However, other than a limited discussion at the oral hearing, there was
little evidence on the record of the proceeding explaining why it is necessary to continue
to separate the groupings for capital tracker purposes. Mr. Eck explained that the
metering unmetered oilfield project is different because of additional system upgrades
that must be made in conjunction with the addition of the meters. However, the
Commission considers that this distinction may not be sufficient, on its own, to justify the
separation of the project into its own group in future years. The Commission considers
that there are many instances of capital trackers that include different types of interrelated
assets which are included within the same grouping because the various capital additions
all have similar drivers. Accordingly, Fortis is directed to explain, in its next capital
tracker application, why it is not reasonable to group all metering-related projects and
programs into a single grouping, and whether such grouping is warranted. . . Paragraph 87
3.
Within the Metering Unmetered Oilfield project, Fortis included the conversion from
three-wire to four-wire services. Fortis included this component in the grouping because
the work is generally done at the same time as the work on the Metering Unmetered
Oilfield project. However, Fortis indicated that the conversion from three-wire to fourwire services is done to address safety concerns and to maintain compliance with CSA
standards. The Commission considers that this is a different driver from other metering
projects, which are generally driven by the need to improve or maintain the effectiveness
Decision 3220-D01-2015 (March 5, 2015) • 145
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
of collecting metering data by the company. For the purpose of this decision, the
Commission accepts grouping the conversion of three-wire to four-wire services with the
Metering Unmetered Oilfield project because recently Fortis has been managing these
projects together. However, Fortis is directed to reassess, in its next capital tracker
application, the grouping of the conversion of three-wire to four-wire services, and fully
explain the reasons why Fortis has or has not disaggregated the program. If the
conversion of three-wire to four-wire services program is disaggregated, for the purposes
of the capital tracker accounting test, the Commission considers that it would be
necessary for Fortis to align the capital additions under the three-wire to four-wire
conversion program made during the PBR term with the capital additions under the threewire to four-wire conversion program that existed prior to, and after, this activity was
merged with the metering unmetered oilfield services. .................................. Paragraph 88
4.
With respect to the separated groupings of the CSAR program, the Worst Performing
Feeders program and the Urgent Repairs program, the Commission is willing to accept
the separation of these programs into separate groupings for the purpose of this decision
because Fortis has historically managed the three programs separately. The Commission
observes, however, that a relationship exists between these programs. Work being done
on the CSAR program, which is done on a seven-year cycle, may reduce the amount of
work done on an annual basis under the worst performing feeders and urgent repairs
programs. Further, the assets involved with these three programs are likely to be similar,
and the driver for the three programs would generally be to address issues resulting in
outages on the system. Accordingly, Fortis is directed to explain, in its next capital
tracker application, whether it is possible to group the three programs together and
whether such a grouping is warranted. ........................................................... Paragraph 89
5.
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 20142015 forecast capital expenditures, including capital tracker projects, consistent with the
company’s capitalization and allocation methodologies. ............................. Paragraph 159
6.
Fortis noted that the Commission approved its capitalized overhead deferral in Decision
2010-309 at paragraph 321. In its next capital tracker application, Fortis is directed to
explain the nature of this overhead deferral account and the effects of the deferral on the
revenue requirement for capital tracker projects for each year under PBR. . Paragraph 161
7.
Within this program, the Commission has reviewed each project presented in the business
case. The Commission finds that for the purpose of this decision, Fortis has provided
sufficient information to justify the forecast costs for each proposed project within the
program that exceeded $300,000. Included in this information, the Commission has
reviewed the overview of the proposed projects, the load forecast of the area affected by
the substation, the detailed cost breakdown tables for each subcomponent of the project, a
description of the other alternatives considered, the project implementation plan and
technical drawings for the project. The Commission has reviewed Fortis’ Substation
Associated Upgrades program and considers that the information provided by Fortis
supports a finding that this program is required to maintain service reliability, quality and
safety at adequate levels. The Commission has reviewed the two planning cost estimate
worksheets that Fortis provided in the undertaking for projects T11-S10 and T15-N10 in
146 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
the 2015 forecast. The Commission observes that some of the detailed cost breakdowns
of each subcomponent for project T11-S10 and T15-N10 provided in the business case,
differ from the costs provided in the planning cost estimate worksheet for these two
projects. The Commission directs Fortis in its next application to provide its 2016 and
2017 planning estimate worksheet for one project in each year. In addition, Fortis is also
directed to continue to provide its detailed cost breakdown table for that same project and
compare line by line the costs in the table to the costs provided in the planning cost
estimate worksheet. ....................................................................................... Paragraph 223
8.
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. ................................................................................. Paragraph 316
9.
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. ............................................................................ Paragraph 319
10.
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. ............................. Paragraph 362
11.
In the Commission’s view, the development of a formal asset health ranking system will
benefit the Commission and interested parties in their understanding of the priority of
projects to be undertaken in a particular year under Fortis’ CSAR program and possibly
other maintenance programs. In doing so, a formal asset health ranking system will
facilitate the Commission’s determination that the scope, level, timing and costs of
forecast capital projects are reasonable and actual costs are prudently incurred. The
Commission directs Fortis to provide updates on the development of the asset health
ranking system in its subsequent capital tracker applications. ..................... Paragraph 487
12.
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. ................................. Paragraph 511
Decision 3220-D01-2015 (March 5, 2015) • 147
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
13.
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 2013464 and the 2015 billing determinants approved in Decision 2014-351 reflecting the new
rate structure approved in Decision 2014-224. ............................................. Paragraph 514
14.
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. ............................................................. Paragraph 515
15.
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. ......................................................................................... Paragraph 520
16.
Accordingly, although the Commission finds the general form of Fortis’ accounting test
model to be reasonable and consistent with the methodology approved in Decision 2013435, 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.
........................................................................................................................ Paragraph 523
17.
In subsequent capital tracker true-up applications, the Commission directs Fortis to
address whether the driver for any of the previously approved forecast projects or
programs has changed, so as to warrant a reassessment under Criterion 2. In the event
that the driver of the project or program has changed since the forecast project or
program was approved, Fortis is directed to identify such projects and programs and to
provide evidentiary support that each project or program continues to satisfy the
requirements of Criterion 2. .......................................................................... Paragraph 532
18.
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. ..................................................................................................... Paragraph 541
148 • Decision 3220-D01-2015 (March 5, 2015)
2013-2015 PBR Capital Tracker Application
FortisAlberta Inc.
19.
At the same time, consistent with the findings in Section 8.2, the Commission considers
that the calculation of the first and second tier materiality thresholds for purposes of the
capital tracker true-up application for a given year should be based on the approved I-X
index for that year. The Commission directs Fortis to follow this approach in future
capital tracker true-up applications. .............................................................. Paragraph 544
20.
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.
........................................................................................................................ Paragraph 545
21.
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.
........................................................................................................................ Paragraph 547
22.
PBR encourages a company to seek out and realize gains in process, operational and
capital productivity continually with respect to those functions and activities funded
under the I-X mechanism, in order to enhance overall profitability. These activities will
in turn benefit ratepayers immediately through the X factor and over the longer term
through lower costs than might otherwise be the case. Capital projects funded through
capital tracker treatment with a true-up to actual costs are not, however, subject to the
same incentives. Accordingly, the Commission requires sufficient information in capital
tracker forecast and true-up applications on the proposed capital tracker projects
themselves, as well as the processes in place to manage those projects, in order to
confirm the need for the project in the manner that is proposed, and to ensure the
prudence of the costs incurred. The Commission considers that formal project
management policies and procedures are necessary to ensure the Commission
understands that the scope, level, timing and costs of forecast capital projects are
reasonable and actual costs have been prudently incurred. The Commission directs Fortis
to describe fully its formal project management policies and procedures in its next capital
tracker application. ........................................................................................ Paragraph 550
23.
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. ....................... Paragraph 589
24.
FortisAlberta Inc. is directed to file a compliance filing application in accordance with
the directions contained within this decision on April 14, 2015. ............. Paragraph 590(1)
Decision 3220-D01-2015 (March 5, 2015) • 149
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