AltaLink Management Ltd.

Transcription

1 Decision 3524-D AltaLink Management Ltd General Tariff Application May 9, 2016

2 Alberta Utilities Commission Decision 3524-D AltaLink Management Ltd General Tariff Application Proceeding 3524 Application May 9, 2016 Published by the: Alberta Utilities Commission Fifth Avenue Place, Fourth Floor, 425 First Street S.W. Calgary, Alberta T2P 3L8 Telephone: Fax: Website:

3 Contents 1 Decision Introduction, procedural schedules and motions Expertise of intervener witnesses Forecasting methodology/process and key assumptions Forecast parameters and assumptions Escalations Contractor escalation rates Capital escalation rates General inflation escalation rates Compensation Market assessment Base pay Union Non-union escalators Executive escalators Pension and benefits Short-term incentive plan Long-term incentive plan Full-time equivalents (FTEs) Vacancy rates O&M expenses Overview total operating expenses (O&M) and total administration and general expenses (A&G) Overview USA 567 right-of-way payments USA vegetation management USA 920 administrative and general salaries USA 923 outside services employed Taxes other than income taxes Transmission depreciation Views of parties Consideration of specific depreciation concepts and methodologies Use of peer groups as comparators in depreciation studies Use of gradualism and moderation and its relation to the UAD decision Necessity of re-examining current depreciation methodologies: the average life group procedure Necessity for the separation of certain accounts into subaccount categories and the requirement for independent life and net salvage studies Average service life and Iowa survivor curve adjustments Account 354 transmission towers and fixtures Account 355 transmission poles and fixtures Account 356 transmission overhead conductors and devices Decision 3524-D (May 9, 2016) i

4 6.3.4 Account general plant computer hardware and Account general plant computer software Remaining depreciation study accounts Net salvage per cent adjustments Account 352 transmission structures and improvements Account 353 transmission station equipment Account transmission system communication and control Account 354 transmission towers and fixtures Account 355 transmission poles and fixtures Account 356 transmission overhead conductors and devices Remaining depreciation study accounts Additional net salvage observations of Commission Member Lyttle Summary of approvals Transmission income taxes Overview Income tax rates Treatment of DAIC for tax purposes Transmission revenue offsets Capital Capital direct assign (DA) Scope of the assessment of direct assign project forecasts within the GTA Uncertainty adjusted forecasting methodology EPCm rate differential estimate Use of 1.5 multiplier for EPCm service costs in direct assign forecasts Alleged failure to enforce labour/material supply contracts Other matters related to direct assign project forecasts Use of risk registers for direct assign projects Capital replacement and upgrades Facility capital costs Facility project common matters General facility maintenance Equipment Storage projects FTSB Relocation project Control Centre Upgrades project Information technology capital expenditures Terms and conditions Transmission necessary working capital Allowance for working capital Financing Financing plan subordinated debt Tariff relief and credit metric support Credit metric support FFO-to-debt ratio Temporary increase in equity thickness of three per cent and one per cent. 177 ii Decision 3524-D (May 9, 2016)

5 13.2 Rate relief proposals Discontinuance of CWIP-in-rate base treatment for direct assign capital projects Refund of previously collected CWIP-in-rate base Discontinuation of FIT and the refund of the previously collected FIT liability No cost capital Self-insurance reserve Future income tax liability balance Pension/post-retirement benefit Rainbow reserve Hearing cost reserve Deferral and reserve accounts Order Appendix 1 Proceeding participants Appendix 2 Oral hearing registered appearances Appendix 3 Summary of Commission directions Appendix 4 Procedural events Appendix 5 Abbreviations List of tables Table 1. Summary of major AltaLink forecast parameters... 7 Table 2. Summary of major AltaLink forecast parameters (October 16, 2015)... 8 Table 3. AltaLink portfolio escalation by PPS cost category breakdown Table 4. AltaLink total company operating expenses Table 5. AltaLink total company - FTEs year-end summary Table 6. Total company operating expenses Table 7. AltaLink total company FTEs year-end summary Table 8. AltaLink corrected normalizing analysis Table 9. USA 567 annual structure payment expenses Table 10. USA 920 administrative and general salaries Table 11. USA 920 administrative and general salaries FTEs Decision 3524-D (May 9, 2016) iii

6 Table 12. USA 920 administrative and general salaries Table 13. USA 920 administrative and general salaries FTEs Table 14. USA 923 outside services employed Table 15. USA 923 outside services employed Table 16. USA 923 major cost categories Table 17. Schedule of transmission depreciation and amortization expense Table 18. Comparison of impact of depreciation proposals based on forecast plant balances as of December 31, 2015 and Table 19. Summary of approved and proposed depreciation parameters Table 20. Comparison of net salvage per cents Table 21. Schedule of transmission computer system costs Table 22. Summary of recent net salvage statistics for Account 355 transmission poles and fixtures Table 23. Summary of proposed and approved estimated average service lives, Iowa curves and net salvage per cents Table 24. Revenue offsets Table 25. Non-affiliate revenues - discrepancy Table 26. Direct assign capital forecast adjustments from EPCm rate differentials Table 27. Facilities projects capital expenditure summary Table 28. AltaLink East Relocation project forecast versus actuals breakdown Table 29. Forecast general facility maintenance expenditures Table 30. Forecast Head Office Plaza expenditures Table 31. Forecast field office building maintenance Table field office building maintenance forecast versus actual variance analysis Table 33. Forecast material storage project expenditures Table 34. IT capital expenditures summary Table 35. IT Hardware/Other projects Table 36. IT Software (SAP) projects iv Decision 3524-D (May 9, 2016)

7 Table 37. SAP software forecast versus actual analysis Table 38. Non-SAP IT expenditures Table 39. SAP software forecast versus actual analysis Table 40. Summary of the impact of proposed tariff relief and modified capital structure Decision 3524-D (May 9, 2016) v

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9 Alberta Utilities Commission Calgary, Alberta Decision 3524-D AltaLink Management Ltd. Proceeding General Tariff Application Application Decision 1. The Alberta Utilities Commission found that some of the factors underpinning AltaLink Management Ltd. s (AltaLink or AML) applied-for revenue requirement for the test years were not reasonable and, therefore, the revenue requirement is not approved as applied-for. 2. The Commission approved, in part, AltaLink s application for tariff relief and credit metric support. The Commission accepted: The use of subordinated debt. The discontinuance of the collection of construction work-in progress (CWIP) in rate base amounts and the return to allowance for funds used during construction (AFUDC ) accounting effective January 1, The refund to customers of the CWIP in rate base amounts for capital projects for the years 2012 to The application of the future income tax (FIT) method for calculating income taxes for 2015 and the flow-through method for calculating income taxes for The main areas where the Commission disagreed with AltaLink were: credit metric measures including the deemed equity component of the capital structure, escalation rates, net salvage rates and particular facility and information technology capital costs. The Commission held that AltaLink had not supported its forecast escalation rates using the latest information reflecting the current trend in the Alberta economy. Nor had AltaLink established that the application of principles of gradualism and moderation should be discontinued when establishing net salvage rates. AltaLink was directed to use the Commission-determined escalation and net salvage rates and to remove the capital costs for specific facility and information technology items from its revenue requirement where the Commission found the reasonableness of these costs had not been demonstrated. 4. AltaLink has been recovering rates on an interim basis for 2015 pursuant to Decision 3504-D and for 2016 pursuant to Decision D The final rates approved by the Commission in this decision for each of 2015 and 2016 will be less than the interim rates currently in place, resulting in a refund to AltaLink s customer, the Alberta Electric System 1 2 Decision 3504-D : AltaLink Management Ltd., 2015 Interim Transmission Facility Owner Tariff, Proceeding 3504, Application , January 26, Decision D : AltaLink Management Ltd., 2016 Interim Transmission Facility Owner Tariff, Proceeding 21168, December 23, Decision 3524-D (May 9, 2016) 1

10 Operator (AESO), the timing and quantum of which will be determined in AltaLink s compliance filing. 5. The Commission ordered AltaLink to refile its application by July 25, 2016 to reflect the Commission's findings and conclusions set out in this decision. At the time of the refiling, the Commission expects that the full impact of this decision on the revenue requirement of AltaLink will be known and, hence, final rates for the test years (except for the direct assigned capital deferral account (DACDA) forecast expenditures) can be set, following completion of the Commission's assessment of whether the refiling is in compliance with this decision. 2 Introduction, procedural schedules and motions 6. On November 18, 2014, AltaLink, in its capacity as General Partner of AltaLink L.P., filed an application with the Commission for approval of its: Revenue requirements for the years 2015 and 2016 in the amounts of $810.5 million and $1,001.6 million, respectively. Tariff as set out in Section 1.4 of the application, including the terms and conditions of service. Deferral accounts for the test period as requested in Section 31.8 of the application. Reserve accounts for the test period as requested in Section 31.7 of the application. 7. The Commission assigned Proceeding 3524 to the application and issued notice on November 19, In accordance with the deadline set out in the notice, statements of intent to participate (SIPs) in Proceeding 3524 were received on or before December 2, The following parties registered SIPs with the Commission: the Alberta Direct Connect Consumers Association (ADC) the Alberta Electric System Operator (AESO) ATCO Electric Ltd. (ATCO Electric) The City of Calgary (Calgary) the Consumers Coalition of Alberta (CCA) the Industrial Power Consumers Association of Alberta (IPCAA) the Office of the Utilities Consumer Advocate (UCA) 8. The ADC, the CCA and IPCAA participated and presented evidence on their own behalf and jointly as members of the Ratepayer Group (RPG). 2 Decision 3524-D (May 9, 2016)

11 9. AltaLink submitted updates and errata filings to its application on: December 10, 2014, in response to Directive 4 from Decision December 15, 2014, in response to the directive at paragraph 276 of Decision January 9, 2015, an errata filing 6 to Figure of the application 10. The Commission issued a process letter on December 10, 2014, establishing the following initial proceeding steps: Process step Deadline Information requests to AltaLink 2 p.m., Tuesday, January 20, 2015 Information responses from AltaLink 2 p.m., Tuesday, February 10, 2015 Submissions from parties on further process 2 p.m., Thursday, February 19, AltaLink filed substantive updates to its original application in June and again, in October As a result of the AltaLink updates, interveners updated their evidence. 12. AltaLink filed rebuttal evidence on December 1, 2015, and the oral hearing was held at the Commission s hearing room in Calgary from December 8 to 17, Written argument was filed on January 18, 2016, and written reply argument on February 9, Consequently, the Commission considers the record for Proceeding 3524 to have closed in February 9, Before the oral hearing for this proceeding, the Commission issued 12 procedural rulings and rulings on evidence in response to requests and motions from both the applicant, AltaLink, and the intervener parties. Particulars of the motions and rulings have been summarized and provided in Appendix 4 to this decision. 14. In reaching the determinations set out within this decision, the Commission has considered all relevant materials comprising the record of this proceeding, including the evidence, argument and reply argument provided by each party. Accordingly, references in this decision to specific parts of the record are intended to assist the reader in understanding the Commission s reasoning relating to a particular matter and should not be taken as an indication that the Commission did not consider all relevant portions of the record with respect to that matter. 2.1 Expertise of intervener witnesses 15. On December 1, 2015, the Commission advised parties that it was not necessary for counsel to request that their respective witnesses be qualified as expert witnesses with regard to their pre-filed written evidence or testimony in the hearing. The Commission further advised that it would continue to assess the weight to be ascribed to witnesses evidence and that opposing Decision : AltaLink Investment Management Ltd. and SNC Lavalin Transmission Ltd. et al., Proposed Sale of AltaLink, L.P. Transmission Assets and Business to MidAmerican (Alberta) Canada Holdings Corporation, Proceeding 3250, Applications , and , November 28, Exhibit AML Exhibit AML Exhibit 3524-X0002. Decision 3524-D (May 9, 2016) 3

12 counsel could examine a witness qualifications, the credibility of the evidence provided and opine on the weight to be given to the evidence The argument and reply argument submissions of AltaLink and the RPG specifically addressed this issue, particularly as applied to witnesses appearing on behalf of the RPG, principally, Mr. de Palezieux and Mr. Tusa. 17. Mr. de Palezieux appeared as a witness for the RPG and presented evidence regarding AltaLink s forecast escalation rates and was responsible for inflation issues and Appendix A to the RPG s pre-filed written evidence. 8 AltaLink argued that Mr. de Palezieux s evidence should be rejected as he holds only a bachelor s degree, has no relevant experience after graduation in 2014 and was not advanced as an expert by the RPG on any subject matter Mr. Tusa, of FTI Consulting Inc. (FTI), appeared as a witness for the RPG and was presented as an expert to provide evidence regarding AltaLink s uncertainty adjusted forecast of capital expenditures and additions, the capital forecast reduction attributable to the engineering, procurement, construction management (EPCm) rate differential, and the appropriateness of the two-times multiplier AltaLink submitted that although Mr. Tusa purported to have provided expert evidence on these matters, he has no qualifications in any of these areas. He does not hold a degree in engineering and is not licensed as an engineer. He is not an economist and holds no degree in economics, math, or statistics and has no experience in forecasting labour market conditions. Further, he has never been qualified to provide an expert opinion on macroeconomic conditions or the state of the economy. 20. AltaLink stated, relying on Decision 3110-D , 11 that the purpose of expert evidence is to assist the trier of fact in reaching a conclusion by applying a particular scientific skill not shared by the judge or the jury to a set of facts and then by expressing an opinion as to what conclusions may be drawn as a result. 12 AltaLink argued that FTI failed to satisfy this criteria as FTI s evidence was mostly irrelevant to the issues, FTI has no specialized training in the matters before the Commission and it advanced several opinions on contractual terms and contractual enforcement that Mr. Tusa was not competent to provide. In particular, with regard to Mr. Tusa s evidence regarding the contractual arrangements that AltaLink has with its EPCm contractor, or the contractual arrangements between its EPCm contractor and various subcontractors, the Alberta Court of Appeal stated in Dow Chemical Inc. v. Shell Chemicals Canada Ltd. 13 that a party cannot call expert evidence on the general meaning of a contract or its terms. AltaLink also referred to the Alberta Court of Appeal decision in Canadian National Railway Co. v. Volker Stevin Contracting Ltd. 14 in which the court determined that it was improper for the trial judge to rely on the evidence of scientific and engineering witnesses on Exhibit 3524-X0678. Transcript, Volume 8, pages Exhibit 3524-X0771, AltaLink argument, PDF page 100. Transcript, Volume 8, page Decision 3110-D : Market Surveillance Administrator, Market Surveillance Administrator allegations against TransAlta Corporation et al., Mr. Nathan Kaiser and Mr. Scott Connelly, Proceeding 3110, Application , Phase 1, July 27, Exhibit 3524-X0771, AltaLink argument, PDF page 95. Dow Chemical Inc. v. Shell Chemicals Canada Ltd., 2010 ABCA 126 at paragraphs Canadian National Railway Co. v. Volker Stevin Contracting Ltd., 1991 ABCA 287 (CanLII). 4 Decision 3524-D (May 9, 2016)

13 how to interpret specific clauses in a contract, as these are matters that must be submitted to the court for determination. 21. By comparison, AltaLink submitted that it was entitled to rely on the evidence of its experts, PricewaterhouseCoopers LLP (PwC) and PowerAdvocate as this evidence had been prepared by recognized experts in their respective fields. 22. The RPG argued in reply that AltaLink s challenge to the admissibility of FTI s evidence should be rejected on the basis it is too late to purport to challenge the admissibility of evidence in closing argument. It contended that Mr. Tusa s expertise in respect of scheduling, project cost assessment and change order analysis was not challenged by AltaLink and that if AltaLink had concerns about the admissibility of this evidence, it should have raised such concern prior to final argument. It submitted that AltaLink s allegation that FTI breached the duties of an expert, by referring to clauses and purchase orders for prior AltaLink projects in its report, was without merit because all Mr. Tusa did was refer to standard clauses of construction contracts dealing with the question of who will be responsible for cost overruns caused by delays. The RPG submitted that Mr. Tusa s business experience and understanding of such clauses should be considered to be relevant evidence, and helpful to the Commission. 23. The RPG argued that the case law cited by AltaLink in support of its view regarding FTI s testimony could be distinguished as these cases concerned a civil action for breach of contract, where the outcome of the case turned on the interpretation of the contracts. As such, the cited cases were not relevant to a rate setting proceeding. Moreover, the Commission was not bound by the rules of evidence applicable to judicial proceedings and Commission proceedings frequently allow witnesses to describe their business understanding of key contracts so long as no legal opinion is offered. Commission findings 24. The Commission will not disregard the evidence of Mr. Tusa or Mr. de Palezieux. Rather, in the findings that follow, and consistent with its December 1, 2015 direction, will assess the weight to be ascribed to these witnesses evidence having considered their qualifications, background and relevant experience in relation to the areas to which they provided evidence, and considering the persuasiveness of their evidence. 3 Forecasting methodology/process and key assumptions 25. AltaLink set out its forecasting methodology and process in Section 1.8 of the application. It stated that its application is consistent with the Uniform System of Accounts/Minimum Filing Requirements (USA/MFR) Consensus document and accords with the direction in paragraph 124 of Decision [ 15 ] AltaLink further explained: It had implemented zero-based budgeting several years ago Decision : AltaLink Management Ltd., General Tariff Application, Proceeding 1021, Application , November 18, Exhibit AML-3524, application, page 1-11, paragraph 50. Decision 3524-D (May 9, 2016) 5

14 Each department assessed all activities required to be performed to meet the objectives necessary to its statutory duties and obligations during the test period. Departmental reassessments established the full-time equivalents (FTE) and contractor levels required to carry out forecast workloads and general operating expenses (GOE). 27. Guidelines, as described in Section of the application, were established for each of the operating departments by the finance department. Those guidelines were followed in the preparation of each department s 17 forecast and those forecasts were then adjusted by the general forecasting parameters and rolled up to form the forecast for the company. 28. Once the activities for the general tariff application (GTA) test years were forecast, AltaLink assessed the activities to determine which costs should be capitalized as required by its capitalization policy. It further explained that both International Financial Reporting Standards (IFRS) and its capitalization policy dictated that no indirectly attributable internal labour costs or costs in support of capital projects were to be included in the capital program. Subsequently, AltaLink compared its 2015 and 2016 forecasts against its 2013 actuals and 2014 management update and, additionally, examined its capital and operating expenses in its compliance filing to assess the consistency and range of reasonableness of its forecast AltaLink also included as Appendix 1-C, a table listing each of the positions at AltaLink by functional group as directed in Decision and Decision No parties made any comments specific to the forecasting methodology in final argument or reply argument. Commission findings 31. Direction 1 from Decision stated: 1. The Commission must have full visibility of the process by which AltaLink converts its department-level forecasts into the FTEs requested in individual O&M [operating and maintenance] USA accounts. The Commission directs AltaLink to clearly and precisely set out the following information in an updated FTE forecast in the refiling: the name of each AltaLink staff position, specified at the most detailed level possible, by department a clear identification of the AltaLink cost centre (not USA account) for each AltaLink staff position for each AltaLink staff position, the specific allocation that has been applied between O&M and capital, expressed as a percentage for each AltaLink staff position allocated wholly or partially to O&M, the USA to which the FTE is assigned... Paragraph Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Projects, Customer Service, Communications and Stakeholder Engagement, Law and Regulatory, Corporate Development and Human Resources were the departments cited. Exhibit AML-3524, application, pages 1-13 to 1-14, paragraphs Decision : AltaLink Management Ltd., General Tariff Application, Proceeding 2044, Application , November 12, Decision : AltaLink Management Ltd. Refiling Pursuant to Decision and Decision , Proceeding 3024, Application , September 8, 2014, paragraph Decision 3524-D (May 9, 2016)

15 32. Further, in Decision the Commission stated: 22. No interested parties specifically commented on AltaLink s response to Directive 1 in argument or reply. This notwithstanding, the Commission makes the following additional findings with respect to AltaLink s response to Directive 1. First, the Commission finds that the breakdown of full-time equivalents (FTEs) by position by cost centre and showing the operating and maintenance (O&M) versus capital split applied for each position indicated in Attachment B-01 of Section B of the refiling application complies in full with Directive 1. Second, the Commission finds that the information provided in Attachment B-01 would be of significant assistance in processing future AltaLink GTAs. Accordingly, the Commission directs AltaLink to provide a breakdown of individual job classifications and FTEs, disaggregated by cost centre for each appliedfor test year in AltaLink s next GTA The Commission continues to find the information provided in Appendix 1-C of the application to be of assistance and directs AltaLink to continue to provide this information in future GTAs. 3.1 Forecast parameters and assumptions 34. AltaLink s revenue requirement forecast for the test period relied on the assumptions outlined in Table in Section of the application. The escalators applied by AltaLink in Table are reproduced, in part, as follows: Table 1. Labour escalation Summary of major AltaLink forecast parameters (%) Salary and wages (labour) Union Non-union Executive Contractor General inflation Capital escalation Source: Exhibit AML-3524, application, Table AltaLink did not change these forecast parameters in its June 1, 2015 amendment 23 but did provide the following update in its October 16, 2015 update filing: Decision , Appendix 3 Summary of Commission directions. Decision , paragraph 22. Exhibit 3524-X0299, June update. Exhibit 3524-X0418, October 2015 update. Decision 3524-D (May 9, 2016) 7

16 Table 2. Summary of major AltaLink forecast parameters (October 16, 2015) Labour escalation (%) Salary and wages (labour) Union Non-union Executive Contractor General inflation Capital escalation Source: Exhibit 3524-X0418, October 2015 update, Table The forecasts in Table were prepared by each department using constant 2014 dollars and inflationary increases were subsequently added. General inflation was based on the Alberta Government s Economic Outlook for the test years. 25 Escalation rates for 2015 were updated on August 28, 2014, based on the Economic Trends quarterly update published by the Alberta Treasury Board and Finance. It further explained that: Escalation factors have been specifically forecast for other expenses such as salaries, benefits, contracted manpower, insurance, property taxes, ASP [annual structure payments] and capital projects as described below: salary and benefits escalation is based on analysis which is discussed in Section 1.8.5; in certain cases, contracted manpower costs are based on the forecast of market rates in specific contractor categories. Where specific market rate information was not available at the time of forecast, those areas of contracted manpower are adjusted similarly to labour escalation; General Operating Expense (GOE) escalation is based on general inflation rates and usage rates. Office expense, staff expense and building-related costs are escalated using the general inflation rates noted above; ASP and details of escalation can be found in Section and in Appendix 12.1 of this Application; property and business taxes as well as insurance costs are escalated based on industry specific rates, as described in Sections 5.4 and of this Application; and capital project forecasts were escalated as provided in Section 10.2 of this Application Escalations 37. AltaLink set out its labour overview in Section of its application. In that and subsequent subsections, AltaLink indicated there to be a supply shortage of qualified employees to meet the demand of available positions both in the Alberta labour market and the electric utility industry across Canada. It is forecast to worsen over the coming years Exhibit AML-3524, application, Section 1.8.4, paragraph 90. Exhibit AML-3524, application, paragraph 56. Capital escalators were mentioned in Section 10.2 but details were not provided in that section. Further discussion on this topic is at Section of this decision. Exhibit AML-3524, application, paragraph 92 and paragraphs of the application cite sources such as the 2013 Annual Alberta Labour Market Review, Alberta s Occupational Demand and Supply Outlook 8 Decision 3524-D (May 9, 2016)

17 38. This section of the decision addresses contractor, general inflation and capital escalators. Escalators regarding union, non-union and executive employees are discussed in the compensation section of this decision Contractor escalation rates 39. AltaLink initially forecast contractor escalation rates of 5.45 per cent for 2015 and 5.22 per cent for It subsequently revised these rates to 4.90 per cent for 2015 and 2.00 per cent for AltaLink determines its forecast for contractor escalation rates: based on the forecast of market rates in specific contractor categories. Where specific market rate information was not available at the time of forecast, those areas of contracted manpower are adjusted similarly to labour escalation; When it updated its contractor escalation rates, AltaLink stated: For many years, AltaLink has used the blended employee labour escalation rate as a forecast for operating expense related contractor escalation rates where specific market rate information is not available. Operating expense contractors primarily provide labour and as a result, they would be subject to the same escalation pressures as AltaLink would be for employees. AltaLink will revise the contracted manpower escalation rates as follows and will provide updated forecast schedules: 2015 reduction from 5.45% to 4.9% 2016 reduction from 5.22% to 4.27% The RPG opposed the escalation rates proposed by AltaLink and argued that AltaLink should make reasonable efforts, due to the economic downturn, to seek lower contractor rates. It submitted that: AltaLink s contractor employees face similar labor forces as AltaLink s non-union and executive employees. Contractor companies across the province, particularly construction and engineering firms, are under pressure to cut prices for their customers and are laying off many workers. Much like all the rest of AltaLink s labor categories, the labor supply for the contractor market is increasing due to the Alberta economic circumstances and is putting downward pressure on compensation. The Ratepayer Group recommends escalation rates of 0.7% in 2015 and 2.2% in and the Power in Motion Labour Market Information Study Full Report (2012 Update), each indicating expected labour shortages in coming years. Exhibit AML-3524, application, Table , paragraph 55. In paragraph 56 of Exhibit AML-3524, for contractor rates AltaLink stated: in certain cases, contracted manpower costs are based on the forecast of market rates in specific contractor categories. Where specific market rate information was not available at the time of forecast, those areas of contracted manpower are adjusted similarly to labour escalation. Exhibit 3524-X0418, October 2015 update, Table , paragraph 80. Exhibit AML-3524, application, paragraph 56. Exhibit 3524-X0039, PDF page 7, response to AML-AUC-2015Jan20-002(b). Exhibit 3524-X0671, RPG revised evidence, paragraph 179. Decision 3524-D (May 9, 2016) 9

18 43. The RPG s recommended contractor escalation rates of 0.7 per cent for 2015 and 2.2 per cent for 2016 were based on the Conference Board of Canada s forecast Alberta Wage and Salary escalation (summer 2015). 33 Commission findings 44. In Decision the Commission stated the following: 37. The CCA noted that the 4.81 per cent contractor escalation rate was derived as a weighted average of different salary escalation rates for AltaLink union, non-union, and executive staff, and expressed concern that AltaLink had not provided any independent support for its contracted manpower escalator. The CCA expressed specific concern that AltaLink s approach of using a blended weighted average of salary escalation rates, for different types of AltaLink staff, reflected AltaLink s internal staff escalation practices, including progression related increases for union staff and adjustments for non-union staff designed to achieve market compensation levels. Accordingly, rather than reflecting AltaLink s internal salary structure, the CCA submitted that AltaLink should be directed to use contracted manpower escalation rates for both O&M and capital in a range between 3.5 per cent and 3.75 per cent. 42. The Commission shares some of the CCA s concerns that AltaLink s proposed escalator for contracted manpower may be excessive. In particular, it is not clear to the Commission that agreed-upon escalators arising from union labour agreements with AltaLink apply to the market for contracted manpower. The Commission also considers that the increases included in AltaLink s salary escalator for non-union labour do not apply to the market for contractor services. In view of the foregoing, the Commission considers that an escalator of 3.75 per cent per year, which is at the high end of the range proposed by the CCA, is reasonable. AltaLink is directed to make adjustments to all contracted manpower forecasts that relied upon AltaLink s proposed 4.81 per cent escalator at the time of its refiling. 45. The Commission continues to have the same concerns expressed in Decision It is not persuaded that increases included in AltaLink s salary escalator for non-union labour or union negotiated increases properly apply to the market for contractor services. Further, AltaLink has failed to provide a breakdown of how it established its contractor escalation rates as between specific market rates and its own labour escalation rates. AltaLink explained that it determines its forecast of contracted manpower costs by reviewing both the forecast of market rates in specific contractor categories and, where specific market rate information is not available at the time of forecast, adjusting those areas of contracted manpower to labour escalation. 34 However, it did not explain or provide a breakdown of how the aggregate contractor escalator was calculated as between market rates and its own labour escalator. The only information provided was AltaLink s own internal escalator rates for labour, which for non-union base pay annual increases, included a 2.0 per cent 35 escalation to achieve market median target total direct compensation and a further 1.0 per cent 36 to represent progression increases. As AltaLink s labour rates include adjustments for progression and movement to the market median, the Commission finds that neither of these amounts should be included in the determination of proper escalation rates for contractors Exhibit 3524-X0778, RPG argument, paragraphs Exhibit AML-3524, application, paragraph 56. Exhibit AML-3524, application, Table Exhibit AML-3524, application, Table Decision 3524-D (May 9, 2016)

19 46. The Commission accepts the submissions of the RPG regarding the decline in the Alberta economy, the increase in unemployment, and the increase in the supply of contractor labour. Based on the updated evidence, the Commission considers that the extent of labour shortages identified in AltaLink s initial forecast does not exist today. 47. Removing 3.0 per cent from AltaLink s updated escalation rates 37 for contractors to account for AltaLink s internal adjustments for progression and movement to market median, results in contractor escalation rates of 1.90 per cent for 2015 and 1.27 per cent for These rates are similar to those forecast by the Conference Board of Canada s forecast Alberta Wage and Salary escalation from summer AltaLink is directed to reflect contractor escalation rates of 1.90 per cent for 2015 and 1.27 per cent for 2016 in its compliance filing Capital escalation rates 48. AltaLink presented its forecast capital project escalation rates in Table of its original application and provided an explanation for escalating capital projects in Section 10.2 of its application Section 10.2 of the original application forecast capital escalation rates of 5.4 per cent for 2015 and 6.5 per cent for These forecasts were determined by PowerAdvocate, whom AltaLink engaged for this purpose. 39 AltaLink did not adjust these rates when it updated its application in October of Section 10.2 of the revised application does not refer to these rates but only to a single rate of 3.2 per cent that is used to adjust expenditures delayed from 2015 to 2016 for expected annual inflation in 2016, referring to updates provided in IR AML- CCA-2015MAY01-092(a) In AML-CCA-2015MAY01-092(a), AltaLink stated that it had completed its update of escalation rates for DA (direct assign) projects, and that the updated three-year compound annual growth rate (CAGR) for AltaLink s capital portfolio was 3.4 per cent and the annual five-year portfolio escalation CAGR was 3.9 per cent. 42 For the source of these rates, AltaLink referred to the updated escalation study produced by PowerAdvocate, dated June 16, 2015, that it provided as an attachment to the IR See paragraph 110. Exhibit AML-3524, application, paragraph 56. Exhibit AML-3524, PDF page 3043 (Appendix 19-D). Exhibit 3524-X0418, October 2015 update, paragraph 82. Exhibit 3524-X0418, October 2015 update, paragraph 620. Exhibit 3524-X0317, PDF page 19. Exhibit 3524-X0317, PDF pages (AltaLink Capital Project Escalation Planning: 2015 Update). Decision 3524-D (May 9, 2016) 11

20 51. The updated escalation study by PowerAdvocate included the following summary table: Table 3. AltaLink portfolio escalation by PPS cost category breakdown Category % of AltaLink portfolio Projected YOY escalation (%) 3-year escalation (4Q Q 2017) 3-year CAGR 5-year escalation (4Q Q 2019) Labour Materials Distributed cost Owner cost Other cost Portfolio Source: Exhibit 3524-X0317, PDF page The three-year and five-year CAGRs referred to by AltaLink appear in the last row of Table 3 above in the third last and last columns, respectively. These CAGRs are obtained by compounding and then geometrically averaging the Projected YOY Escalation values in the last row of the table, for 2015, 2016 and 2017 in the three-year CAGR, and for 2015, 2016, 2017, 2018 and 2019 in the five-year CAGR. The specific 2016 escalator value of 3.2 per cent that AltaLink stated it used for escalating costs shifted from 2015 to 2016, appears in the fourth column of the last row of this table. The corresponding 2015 escalator in the third column of the last row is 2.3 per cent. 53. As Table 3 indicates, for each year, escalators are obtained for labour, materials, distributed cost, owner cost, and other cost; these escalators for each category are weighted by the percentage shares in the second column of the table to obtain the overall (or portfolio) escalator for that year. The methodology used to obtain forecasts of escalators for the various categories is not explained by PowerAdvocate in its report. PowerAdvocate does, however, provide a number of assumptions or conclusions that underlie its forecasts. These include: 5-year CAGR Recent market conditions will cause reduced rates of escalation in 2015; however, the transmission industry should gradually recover by Slowdowns in materials and labour in 2015 and 2016 drive low escalation rates; afterwards, the industry should recover along with escalation rates. 45 WTI [West Texas Intermediate spot oil] prices should remain in the $50-60 range over the next couple of months, but should rebound to higher prices in the long term. 46 As CAD and oil prices are highly correlated, they should strengthen together, which would reduce prices for items procured outside of Canada. 47 The weak Canadian dollar has widened the gap between CAD and USD commodity prices; however, the gap should close if oil prices rebound Exhibit 3524-X0317, PDF page 24. Exhibit 3524-X0317, PDF page 25. Exhibit 3524-X0317, PDF page 28. Exhibit 3524-X0317, PDF page Decision 3524-D (May 9, 2016)

21 54. In its report, PowerAdvocate explained that it developed a customized index to reflect the elasticity more accurately and to identify the cost drivers of Alberta s construction labour market. 49 Power Advocate s Alberta custom constrained labour market index was composed of direct labour costs (60 per cent), demand market premium costs (30 per cent) and equipment costs (10 per cent). In turn, each of these categories comprised a number of other indexes. The construction equipment rental index comprised (i) the Producer Price Index (PPI) for construction, transportation, mining and forestry equipment rental and leasing, Canada; (ii) an index for diesel fuel at self-service filling stations in Calgary; and (iii) the Consumer Price Index (CPI) for transportation. The weights for these three components were not specified. The demand market premium index comprised indexes of (i) electric power engineering construction in Canada (7.5 per cent of the 30 per cent weight) and (ii) in Alberta (7.5 per cent), (iii) total capital expenditure on construction in Canada (2.5 per cent) and (iv) in Alberta (7.5 per cent), (v) transmission and distribution (T&D) labour demand in Alberta (2.5 per cent), and (vi) highvoltage (HV) lineman demand in Canada (2.5 per cent). The direct labour costs index, also referred to as the weekly take-home pay index, is designed to track the escalation of the cost of labour to the subcontractor (excluding per diem and subcontractor fees, which are reflected in the demand market premium index). 50 It includes labourer straight time pay, labourer overtime pay, and additional direct costs to the subcontractor calculated as a fixed percentage of the base wage (e.g., overhead, burden, 10 per cent Alberta wage bonus, taxes and other miscellaneous). The weekly take-home pay is calculated as the sum of two components: (i) the sum of wages and supplements multiplied by average weekly hours worked excluding overtime (for utility system construction in Alberta), and (ii) the sum of wages and supplements multiplied by average weekly overtime hours worked (for utility system construction in Alberta) multiplied by 1.5. None of the specific data series that are used in formulating these indexes were specified, although in terms of wage rates, a graph showing growth in an index of Alberta construction union wages is included in the report Less detail was provided by PowerAdvocate in its report concerning the other cost categories included in Table 3. Specific details of the component indexes, sources for any of the data, including data for the labour indexes, or the method used to obtain forecasts of any of the series underlying the escalators, or the escalators themselves, were not provided. 56. In its evidence, the RPG stated that due to current Alberta labor market conditions, it believed that labour escalation rate components within AltaLink s capital escalation rate would be no greater than forecast wage inflation in the province. 52 Therefore, the escalation rates for labour in Table 3 for 2015 and 2016, of 4.4 per cent and 2.2 per cent respectively, should be replaced with 0.7 per cent and 2.2 per cent respectively, in accordance with the Conference Board of Canada s Summer 2015 forecast of Alberta Wage and Salary escalations. The RPG also stated that most of the other component escalation rates within AltaLink s capital escalation rate, including materials, distributed cost, owner costs, and other costs, included some elements of labour work on projects among other costs. 53 Since these components of capital escalation rates were mixed by nature and, given the current labour market and downward trending Alberta economy, it recommended that, in line with Alberta CPI rates forecast by the government of Exhibit 3524-X0317, PDF page 30. Exhibit 3524-X0317, PDF page 38. Exhibit 3524-X0317, PDF page 41. Exhibit 3524-X0317, PDF page 40. Exhibit 3524-X0670, RPG revised evidence, Appendix A, paragraph 72, PDF page 95. Exhibit 3524-X0670, RPG revised evidence, Appendix A, paragraph 73, PDF page 95. Decision 3524-D (May 9, 2016) 13

22 Alberta in its first quarter 2015 fiscal update, materials, distributed cost, owner costs, and other escalation rates of 0.9 per cent and 1.7 per cent be used in 2015 and 2016, respectively. The RPG also performed a cost breakdown based on portfolio (transmission, substation, telecom)/ category/subcategory; all with associated weights. This cost breakdown, using AltaLink s original escalators for each portfolio/category/subcategory, 54 approximately reproduced AltaLink s original overall escalators of 5.4 per cent and 6.5 per cent for 2015 and Using the same technique, but with its recommended escalators of 0.7 per cent and 2.2 per cent for 2015 and 2016 for labour, and 0.9 per cent and 1.7 per cent for all other categories, yielded the RPG s recommended capital escalation rates of 0.66 per cent for 2015 and 1.86 per cent for In its evidence, FTI also considered AltaLink s revised capital escalation rates of 2.3 per cent for 2015 and 3.2 per cent for 2016 to be unreasonable, given current market/ economic conditions for labour, material, and distributed costs. 56 Using the same approach as the RPG, FTI replaced the labour, material and distributed cost escalation rates used in AltaLink s weighted portfolio escalation rate model with elements reflecting current market and economic conditions, as provided by Statistics Canada and economic data from the Conference Board of Canada s Provincial Outlook Economic Forecast for summer When current market and economic escalation rates were applied to AltaLink s weighted average portfolio model, capital escalations for 2015 and 2016 were 0.95 per cent and 1.84 per cent, respectively. 58. AltaLink submitted rebuttal evidence in response to the recommendations of the RPG and FTI. AltaLink explained that its methodology was reflective of the market, specifically considered the exact items that are most pertinent to AltaLink s capital program, and could be substantiated through publically-available indices. 57 AltaLink stated further that in recommending escalations based on the CPI, FTI and RPG were confusing general inflation with the very specific cost escalations associated with the construction of transmission capital projects, and further, escalation related to transmission construction is fundamentally different than generic consumer inflation. 58 For labour costs, AltaLink argued that 2015 forecast expenditures were based on July actuals to date and, therefore, were reflective of actual labour costs, while 2016 forecast expenditures reflect a labour forecast based on relevant and publicallyavailable indices. 59 AltaLink also took issue with the FTI claim that an economic downturn in Alberta had put downward pressure on labour costs, arguing that employers rarely, if ever, make cuts to nominal wages In its argument, AltaLink also responded to the use of the Electric Utility Construction Price Index (EUCPI), an index produced by Statistics Canada that was suggested as an alternative during questioning from the Commission. 61 AltaLink stated that the EUCPI is not representative of AltaLink s specific transmission system portfolio, the transmission line systems Exhibit 3524-X0087, PDF page 5, AML-CCA-2015JAN20-035REV. Exhibit 3524-X0670, RPG revised evidence, Appendix A, paragraph 74, PDF pages Exhibit 3524-X0673, FTI revised evidence, page 27. Exhibit 3524-X0679, AltaLink rebuttal, paragraph 553. Exhibit 3524-X0679, AltaLink rebuttal, paragraph 556. Exhibit 3524-X0679, AltaLink rebuttal, paragraph 561. Exhibit 3524-X0679, AltaLink rebuttal, paragraph 562. Transcript, Volume 7, pages 1340 and Decision 3524-D (May 9, 2016)