Yukon Utilities Board. Board Order Appendix A: Reasons for Decision April 23, 2014

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1 Yukon Utilities Board Board Order Appendix A: Reasons for Decision April 23, 2014

2 Contents 1 Introduction YECL Sales and Revenue Overview Original Residential and Commercial Sales forecast Residential sales forecast Commercial sales forecast Updated Residential and Commercial sales forecast Views of the interveners Views of the Board Industrial sales deferral account Views of interveners Views of the Board Purchase Power Views of interveners Views of the Board Capitalization of incremental purchase power when Fish Lake down Views of interveners Views of the Board Fuel Costs Views of interveners Views of the Board Operations and Maintenance Expense Labour Views of interveners Views of the Board Vacancy Rate Views of the Interveners Board Findings Labour Inflation Views of the Interveners Views of the Board Capitalization of Labour Views of the interveners Views of the Board Pension matters Defined Benefit Plan Contributions Views of interveners Views of the Board Defined Benefit Deferral Account Views of interveners Views of the Board Defined Contribution Plan Contributions Views of the Board Board Order Appendix A: Reasons for Decision Page i of 105

3 5.4.4 Non-Labour Costs Non-Labour Inflation Views of the Board UCG Request to Reduce Non-Labour O&M Per Customer Views of the interveners Views of the Board Affiliate Costs Views of the Interveners Views of the Board Discontinuance of Third Party Distribution Line (Property) Insurance Views of the Board Issues raised by interveners UCG Recommendation for the Board to Engage an Independent Expert Views of the Board Taxes Other Than Income Views of the Board Depreciation Future Removal and Site Restoration (FRSR) Views of interveners Views of the Board Lifespan Analysis Views of the Board Depreciation Deferral Account Views of the Board Return on Rate Base Cost of capital Views of the Board Automatic Adjustment Mechanism (AAM) Views of the Board Common equity ratio Views of the Board Costs of debt Views of the Board No cost capital Views of the Board International Financial Reporting Standards (IFRS) Views of the Board Capital Additions Views of the Board Deferred study costs Watson Lake bi-fuel project study costs Views of the Board Kluane wind study Board Order Appendix A: Reasons for Decision Page ii of 105

4 Views of the Board Project cost overruns Views of the Board Limiting project expenditures to the avg net expenditures of last five years Views of the Board CIS billing system conversion Views of the Board Other projects Views of the Board Projects that are related but not included in a business case Fish Lake unit #1 generator end-of-life rebuild Views of the Board Whitehorse service storage complex projects Views of the Board Meter replacement program Views of the Board Major capital projects Automated meter reading Whitehorse and area (Bus. Case #27) Views of the Board Watson Lake bi-fuel project (Business Case #6) Views of the Board Carcross 2 MVA standby project (Business Case #12) Views of the Board Significant capital projects Views of the Board Income Tax Views of the Board Yukon Five-Year Demand Side Management Plan Views of the Board Other Matters Deferral Accounts Views of the Board Retroactive Ratemaking Views of the Board Inflammatory Comments Views of the Board Prior Board Directions Views of the Board Board Order Appendix A: Reasons for Decision Page iii of 105

5 List of tables Table 1. Table 2. Table 3. Table 4. Table 5. Table 6. Table 7. Table 8. Table 9. Table 10. Table 11. Table 12. Table 13. Table 14. Table 15. Table 16. Table 17. Table 18. Table 19. Table 20. Table 21. Table 22. Table 23. Table 24. YECL Energy Sales Comparison of Original and Updated energy sales forecast (kwh)... 6 Actual and forecast purchase power 2008 to 2015 ($000) Actual and forecast fuel costs 2008 to 2015 ($000) Full-time employee complement Pension funding requirements (funding period ending Dec. 31)($000) Pension funding requirements (funding period ending Dec. 31)($000) Operations and maintenance expenses per customer YECL Taxes other than income YECL Depreciation Expense Change in Depreciation Expense with FRSR removed ($000) YECL Forecast Return on Rate base YECL Cost of Debt Calculations YECL Forecast Interest Rates for 2014 (%) (30 year yield or bond rate) YECL Forecast No-cost capital Capital expenditures and additions ($000) YECL updated forecast; capital additions and expenditures Deferred charges and credits ($000) Continuity of capital additions ($000) New extension capital expenditure projects ($000) YECL capital expenditure summary table Actual and forecast meter expenditures ( ) YECL Forecast Income Tax Expense DSM Panel Table 25. DSM Costs incurred by YEC and YECL (excluding costs related to DSM plan development) Board Order Appendix A: Reasons for Decision Page iv of 105

6 1 INTRODUCTION On May 27, 2013, Yukon Electrical Company Ltd. (YECL, Applicant) filed with the Yukon Utilities Board (Board) an application, pursuant to the Public Utilities Act and Order-in-Council 1995/90, for approval of its forecast revenue requirements for the 2013 to 2015 inclusive test years, approval of interim retail rates for 2013, approval of the continued use of the deferral accounts listed within the application, approval to discontinue purchasing third party distribution line (property) insurance at the expiry of the insurance policy July 1, 2014, and approval of updated depreciation parameters (Application). YECL is a private- investor-owned utility serving more than 16,700 customers in 19 communities in Yukon. YECL purchases power from YEC for distribution to customers in Whitehorse, Marsh Lake, Tagish, Teslin, Haines Junction, Carmacks, Stewart Crossing, Pelly Crossing, Carcross, Keno and Ross River. YECL generates and distributes power in Old Crow, Beaver Creek, Destruction Bay, Burwash Landing, Upper Liard, Lower Post, Watson Lake and Swift River. Other areas that YECL serve include Canyon Creek, Deep Creek, Takhini River Crossing as well as rural areas surrounding Whitehorse. In addition, the Applicant owns and operates the Fish Lake Hydro plant outside of Whitehorse and maintains backup generating plants in Carmacks, Teslin, Haines Junction, Ross River, Pelly Crossing and Stewart Crossing. YECL is seeking approval of a revenue requirement of $ million for 2013, $57,458 million for 2014 and $ million for In addition, YECL is seeking approval for the following deferral accounts 2 : Whitehorse Copper Tailings; Purchased Power Flow Through; Diesel Contingency Fund; Fuel Price Flow Through; Depreciation Parameters; Rate of Return on Common Equity; and Defined Benefit Pension Plan. YECL also sought the ability to flow-through, dollar for dollar, to the tariff any costs related to Board Orders or legislative provisions resulting in changes to the rules or parameters that YECL operates under or that bear on the nature and extent of YECL s obligations as a regulated utility and which impact its 2013 to 2015 revenues or revenue requirement 3. The application also sought approval of interim refundable rates effective July 1, 2013 through YECL Rate Adjustment Rider, Rider R. Rider R increases rates for all YECL and YEC retail customer bills excluding Secondary Energy Rate 32. YECL asked that 1 YECL Application, page 1-5 and Schedule 1.1 before other revenue. 2 Each deferral account is discussed in subsequent sections of this decision. 3 YECL Application, page 1-6. Board Order Appendix A: Reasons for Decision Page 1 of 105

7 Rider R be set at 6.5 percent. This would collect approximately one-half of the requested rate increase for The Board approved interim rate adjustments of 6.5 percent for all electrical consumption on or after July 1, 2013 through Board Order issued June 25, On June 6, 2013, the Board issued Board Order regarding the Application, in which the Board ordered YECL to publish a Notice of Application for the General Rate Application (GRA) no later than June 12, 2013 in such appropriate local news publications in YECL s service area to provide adequate notice to the public. YECL was also ordered to make the Application and supporting materials available for inspection at its head office at st Avenue, Whitehorse, Yukon, and to provide a copy of the Application and any supplemental information upon request. Board Order proposed a proceeding schedule, pending ministerial approval, for the Application with a hearing to commence on November 4, On June 20, 2013, the Minister of Justice authorized the Board to incur the expenses necessary to conduct a public hearing into the Application pursuant to Section 50 of the Act. The Board, through Board Order , issued June 25, 2013, granted intervener status for this proceeding to the following: City of Whitehorse (CW) John Maissan (Leading Edge or LE) Utilities Consumers Group (UCG) Yukon Conservation Society (YCS) Yukon Energy Corporation (YEC) Town of Watson Lake (WL) The proceeding schedule was amended August 6, 2013 due to a request for an extension for information responses which was approved through Board Order The amended proceeding schedule did not change the dates for the oral public hearing. On August 13, 2013, UCG submitted a motion requesting that the Board issue an order requiring YECL to provide adequate responses to certain IRs submitted by UCG identified in the motion. By way of memorandum dated August 14, 2013, the Board invited comments from YECL on the UCG motion and reply comments from UCG. Board Order , issued August 28, 2013, provided a ruling on the UCG motion and directed YECL to provide further and better information responses by September 5, The remainder of the proceeding schedule was unchanged. On November 04, 2013, the Board held an oral public hearing in Whitehorse, Yukon. The Board was comprised of Bruce McLennan, Chair, and members Andre Fortin, Robert Boisvert and Naresh Prasad. The Board directed parties to file final argument by December 02, 2013 and reply argument by December 16, The Board considers the proceeding closed on December 16, Board Order Appendix A: Reasons for Decision Page 2 of 105

8 In reaching the determinations contained within this decision, the Board has considered all relevant materials of which the record of this proceeding is comprised, including the evidence and 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 Board s reasoning related to a particular matter and should not be taken as an indication that the Board did not consider all relevant portions of the record with respect to that matter. 2 YECL SALES AND REVENUE 2.1 Overview YECL submitted that on a weather-normalized basis, total primary non-industrial sales are forecast to increase by 2.3 percent in 2013, 4 and 2.9 percent in 2014 and YECL further submitted that if it were to include the sales to YECL s industrial customer, Whitehorse Copper Tailings (WHCT), YECL s total sales industrial and non-industrial are forecast to grow by 2.6, 3.1 and 1.9 percent in 2013, 2104 and 2015 respectively. YECL added that its sales and revenue forecast was based on a detailed analysis of historical data by community and customer class. This data was comprised of information gathered by YECL staff who work in the communities as well as consultation with the City of Whitehorse, Yukon government officials and local developers. In Schedule 2.1 of the Application, YECL provided a summary of actual and forecast average number of customers, and sales and revenue by customer class for the period from 2008 to Information that was used to determine the residential sales forecasts by community, was provided by YECL in Attachments 1 to 21 of Schedule Original Residential and Commercial Sales forecast The following table summarizes YECL s energy sales forecast by customer class for the 2013, 2014 and 2015 test years (test period). The table also includes corresponding actuals for 2011 to 2012, and 2012 normalized actuals. Table 1. YECL Energy Sales Actuals Normalized Actuals Forecast Test Period Customer class Residential 141, , , , , ,023 Commercial 150, , , , , ,549 Street Lights 3,598 3,771 3,771 3,725 3,789 3,854 Private Lights Sub-total 296, , , , , ,959 Industrial - - 1,025 4,620 4,620 Total 296, , , , , ,579 Source: Application, Table 1, page YECL submitted that the 2.3 percent growth in sales in 2013 was consistent with the recently Board -approved YEC 2013 forecast growth in wholesale sales to YECL of 2.26 percent. YECL Application, page 2-1. Board Order Appendix A: Reasons for Decision Page 3 of 105

9 In 2012, YECL submitted that it provided electricity services to approximately 16,700 non-lighting customers in its service area and supplied a total of GW.h to residential, commercial and lighting customers. This, YECL pointed out: represents an increase in total primary sales of 6.0%, following a 5.4% increase in Strong economic and population growth in 2010 and 2011 led to the highest housing starts in 2011 since 2006, which, in turn, contributed to a high growth in Yukon Electrical s customer gains in both residential and commercial sectors. This, coupled with colder than Normal weather and a move to use electricity for space heating in more recent housing developments, resulted in strong electricity sales in 2011 and However, for the test period, YECL submitted that the latest economic projection from the Yukon government suggests a sharp slowdown in the pace of economic activity for 2012 and The Yukon government expects slower population growth in 2013, dropping from 2.1 percent in 2012 to 1.3 percent. YECL pointed out that the Canada Mortgage and Housing Corporation forecast a 25-percent decrease in Whitehorse housing starts in 2012 as compared to YECL submitted that this economic and population growth slowdown is expected to impact YECL s customer growth and sales over the next few years Residential sales forecast Respecting its residential sales forecast, YECL submitted that the forecast has two key inputs, net customer additions and the average use per customer (UPC). The energy sales forecast is obtained by multiplying the forecast number of customers, which includes all known residential property developments, by the weather-normalized UPC forecast. YECL explained that the weather-normalized UPC is determined using a two-step approach, where: in the first step, the historical average monthly UPC is regressed on reported monthly Heating Degree Days (HDD), and in the second step, the coefficient of HDD from the regression in first step is multiplied by the difference between the actual HDD and the Normal HDD. Normal HDD is defined as a twenty-year rolling average of HDD. 7 With regard to determining the Whitehorse forecast UPC, YECL explained that it used the 2012 weather-normalized UPC, which [already] reflects the consumption increases due to space heating, as a base and [then raised] it by the most recent three-year average growth in weather-normalized UPC. 8 Notwithstanding, YECL added, the UPC increase related to electric space heating, was not expected to have any impact on sales beyond 2013, as the consumption increase is expected to be offset by a reduction in consumption due to the demand side management program. 5 YECL Application, page 2-3, lines YECL Application, page 2-3, lines YECL Application, page 2-5, lines YECL Application, page 2-5, lines Board Order Appendix A: Reasons for Decision Page 4 of 105

10 2.2.2 Commercial sales forecast With the exception of Whitehorse and Watson Lake, YECL submitted that the commercial UPC forecast for all communities is the most recent three-year average actual UPC for each community. The base year UPC for Watson Lake is obtained based on the most recent threeyear actual UPC. For Whitehorse, the 2012 normalized UPC is used as a base year UPC. This is because of conversion of several secondary commercial customers to primary in recent years makes it inappropriate to use a three-year average. 9 With respect to the determination of the Watson Lake and Whitehorse community sales forecasts, YECL explained that the forecasts take into account twelve large commercial customer additions, 10 that are anticipated during the test period. Therefore, To forecast Whitehorse and Watson Lake commercial energy sales over the test period, Yukon Electrical has first determined the base energy sales for each community, which is forecast by multiplying the forecast customer counts (excluding the new large customer additions), by the corresponding community base year UPC forecast The commercial energy sales for Whitehorse and Watson Lake are then calculated by adding the base energy sales in each year to the specific energy sales of the new large commercial additions. 11 For communities other than Watson Lake and Whitehorse, YECL indicated that the community energy sales forecast is calculated by multiplying the forecast community customer counts by the respective community UPC forecast Updated Residential and Commercial sales forecast On October 31, 2013, YECL updated its application (updated forecast) to ensure that the Board has the best and most recent information available to it on the record. 12 In its updated forecast, YECL submitted that it had updated its residential and commercial forecasts to reflect what has happened in 2013 year-to-date and what can be reasonably be expected to occur for 2014 and The impact of the update on residential sales is a reduction to the forecast of 3.8 GWh for 2013, 3.8 GWh for 2014 and 3.9 GWh for For commercial sales, the impact of the update is a reduction to the forecast of 4.0 GWh for 2013, 4.1 GWh for 2014 and 4.2 GWh for YECL pointed out that actual residential energy sales for the first nine months of 2013 were 3.5 GW.h lower on a normalized basis than what was originally forecast, while customer additions had increased by 33 year-to-date over what was originally forecast. Accordingly, YECL submitted that it was lowering its 2013 residential sales forecast to GW.h from GW.h. YECL also submitted that it was basing the update of its 9 YECL Application, page 2-6, lines Commercial customers whose demand is greater than 100 kw; eleven in Whitehorse and one in Watson Lake. 11 YECL Application, page 2-6, lines Exhibit B-11, YECL updates to GRA, October 31, 2013, page 1 of Exhibit B-11, YECL updates to GRA, October 31, 2013, page 2 of 9. Board Order Appendix A: Reasons for Decision Page 5 of 105

11 residential forecast on an aggregate three year (2010 to 2012) average normalized UPC 14 as was done in its GRA. YECL further submitted that, as was done in the Application, it would continue to hold the updated 2013 UPC forecast for 2014 and 2015 in consideration of the offsetting impacts of the DSM program. 15 As a result of commercial sales being lower in the first nine months of 2013 than was originally forecast, YECL submitted that it was lowering its 2013 forecast commercial sales from the original forecast of GW.h to GW.h. YECL attributed the overforecast to its use of the 2012 normalized UPC for Whitehorse as the baseline. As was done in its application, YECL indicated that it was increasing its UPC in 2014 and 2015 to reflect the addition of specific customers greater than 200 kw. The following table compares YECL s original residential and customer sales forecasts with the updated forecasts. Table 2. Comparison of Original and Updated energy sales forecast (kwh) Original Forecast Updated Forecast Customer class Residential 151, , , , , ,101 Commercial 161, , , , , ,329 Source: Exhibit B-11, YECL updates to GRA, October 31, 2013, Attachment 1 YECL submitted that it did not know the nature of what was underpinning the lowerthan-forecast customer energy sales in the Application. YECL acknowledged that although a large number of its customers were using electric space heating in the newer condominium developments, the average UPC per customer is lower than UPC on average for all of its other customers. When asked to explain its use of a single-year (2012) UPC in the original application, YECL stated that the best information available at the time suggested that using a three-year average UPC might not be fair and reasonable, albeit subsequent actual 2013 customer energy sales indicated that the use of a one-year UPC was incorrect. 16 YECL pointed out that based on the latest available information it had reverted back to the forecasting methodology used in its last GRA, which is a three-year average normalized use per customer Views of the interveners YEC submitted that YECL s updated forecast included a major reduction in YECL s forecast residential and commercial sales on the hydro grid relative to what was provided in the Application and reviewed during the information request (IR) process. The major reduction was related to the 2013 forecast non-industrial grid sales: 14 Exhibit B-11, YECL updates to GRA, October 31, 2013, page 3 of Exhibit B-11, YECL updates to GRA, October 31, 2013, page 3 of November 7, 2013 transcript, page 635, lines November 7, 2013 transcript, page 639, line 5. Board Order Appendix A: Reasons for Decision Page 6 of 105

12 the change for this one year (-7.7 GW.h) accounts for 95% of the total change for 2015 (8.1 GW.h) indicating that forecast annual growth rates from the Application have been retained for 2014 and YEC was concerned that the reduced non-industrial grid sales forecast for 2013, if adopted, would set a new precedent in that it would allow for an adjusted GRA load forecast based on actual results at the time of a hearing. YEC submitted that YECL s proposed downward adjustment was too severe for 2013 non-industrial grid sales. In its Update to the Application YECL noted that "[t]he 2013 forecast is now based on the aggregate three year ( ) average normalized UPC and, in addition, reflects the actual increase in customer additions of 33." Based on the evidence, the magnitude of the YECL forecast update reductions are not explained by reversion to three average normalized UPC. [Footnotes omitted] 19 YEC noted that YECL in response to YEC-YECL-3(c) had previously provided the impact of using a three-year average UPC for Whitehorse residential sales forecasts compared to the 2012 weather normalized UPC used in the Application. The impact was in the range of GW.h for test years. The UPC used for Whitehorse residential sales forecast in original Application [w]as 11,211 kw.h/customer based on 2012 weather normalized UPC plus 0.7% increase compared to 11,083 kw.h/customer based on a 3-year average weather normalized UPC or decrease of 129 kw.h/customer. This multiplied by forecast number of residential customer would result about GW.h reduction in residential sales forecast in contrast to GW.h reductions in total YECL residential sales forecast in the Update for the test years. 20 YEC asserted that the updated forecast as filed could not be fully tested at this late date and that there is limited ability as well for the Board to assess any specific alternative adjustment that could be made to the original application. YEC therefore recommended that the Board retain YECL s non-industrial forecasts per the original application to reflect normal regulatory review practice. However, if the updated forecast is to be allowed to reflect actual results, YEC submitted that the 2013 residential and commercial sales reductions to the original application should be limited to no more than 50 percent of what has been proposed by YECL. Furthermore, this adjustment should be consistently carried through to adjusted 2014 and 2015 forecasts allowing for two-percent growth in 2014 and the end result will increase YECL Update grid generation requirements by at least 4.1 GW.h in 2013 and slightly more in 2014 and Responding to YEC s submission above, YECL asserted that YEC-referenced numbers have no evidentiary support and cannot be relied upon by the Board for purposes of rendering its decision on these issues. Furthermore, there was no rationale or justification in YEC s argument in support of its proposed 50- percent reduction related 18 YEC Final Argument, page YEC Final Argument, page YEC Final Argument, page 19, footnote YEC Final Argument, page 21. Board Order Appendix A: Reasons for Decision Page 7 of 105

13 to the updated forecast. YECL submitted that YEC s calculations, in part, are based on its approved GRA forecasts, which are at least 18 months old and clearly not the latest and best information available for forecasting Yukon Electrical s sales at this point in time. 22 Respecting its updated forecast, YECL reiterated its submission that the decrease in customer sales (residential and commercial) relative to the original forecast on a normalized basis for the first nine months of 2013, was attributable to a decrease in UPC. Incorporating the January-September reduction in UPC as well as well as the increases in the year-to-date customer additions for residential and commercial, Yukon Electrical has provided an updated energy sales forecast for 2013 of GW.h. This update is 7.7 GW.h lower than original forecast of GW.h. This decrease was then incorporated into the 2014 and 2015 updated sales forecasts which were reduced 7.9 GW.h and 8.1 GW.h, respectively. The year over year percent increase in the sales forecast for 2014 and 2015 remains at 1.9% per year which is consistent with the original forecast. 23 YECL submitted that its updated forecast represents the best information available on the record for each of the test years. Furthermore, since YECL has applied for a three-year test period, YECL stressed the importance of having the best information available on the record. Referring to Board Order , wherein the Board concluded that it may consider the best information on the record when it approved the use of YECL s actual 2008 long-term debt rate as opposed to the original forecast, YECL submitted that the Board should apply the principle consistently. UCG expressed its concerns with the updated forecast submitting that YECL s current forecast product, calculated retrospectively, but utilized prospectively, 24 could have an impact on energy prices. Furthermore, the weather normalization process may impact the determination of test year sales used in a rate proceeding because electricity service and revenues are weather-dependent. In view of that, UCG submitted that the Board must satisfy itself that YECL has used an appropriate industry standard methodology to assess its energy requirements. UCG submitted that YECL s sales forecasts incorporates a methodology that is too simplistic and does not incorporate the realities associated with Yukon-specific load data, does not incorporate adequately determined impacts of current and proposed DSM activities, and fails to gather and use input from stakeholders e.g. other utilities with experience in addressing climate normal and current climate trends. UCG asserted that that it is an anomaly to have any utility use only 3 years of actual load data in order to adequately forecast weather-normalized loads going forward. UCG pointed out that YEC load forecast reflects adjustments for weather conditions based on a 10-year average heating degree days. 25 In response, YECL submitted that it has incorporated weather-normalization sales forecasts in its applications since preparing for its GRA. Moreover, YECL 22 YECL Reply Argument, paragraph YECL Reply Argument, paragraph UCG Final Argument, paragraph UCG Reply Argument, paragraph 27. Board Order Appendix A: Reasons for Decision Page 8 of 105

14 submitted that it included a Study on Canadian Energy Forecasting Methodologies, which contained discussions on weather normalization, in Section 11, Attachment 1 of the Application. YECL recommended that the Board dismiss the UCG recommendations Views of the Board The Board notes YECL s submission in the Application that it forecasts the total primary non-industrial sales in 2013 to increase 2.3 percent (on a weather-normalized basis), and the 2.3-percent growth in sales in 2013 was consistent with the recently applied-for and Board-approved YEC 2013 forecast growth in wholesale sales to YECL of 2.26 percent. 26 The Board further notes YECL s explanation regarding the use of a one-year 2012 UPC for Whitehorse was to reflect the consumption increases due to space heating in the newer development areas in Whitehorse and area. Subsequently, YECL updated is forecast, reverting back to the use of a three-year average UPC, which method had been used and approved in the past. The Board has concerns regarding YECL s updated forecast. During the hearing, YECL was questioned as to how the update accounts for the move to electricity for space heating. YECL testified that: we were finding that we were - - actuals were coming in lower than what we had forecast on a normalized basis by about 2.3 per cent. We don t quite have a good understanding exactly why that has happened, but the fact is that the sales are coming in lower than what we had originally forecast on a normalized basis. So exact cause as to whether it s related to space heating, it could be because of the warmer weather, but, however, when we take out the weather component, we re still experiencing lower than sales lower than forecast sales. 27 From the above, the Board is not convinced that the change in methodology on which the updated forecast is based is warranted. The Board accepts YECL s forecast update for 2013 but is not convinced that 2014 and 2015 should be changed from the original forecast. The Board directs YECL to reflect this finding in its revenue requirement and all related schedules in its compliance filing. In addition, the Board directs YECL in its compliance filing to adjust its sales forecast based on the findings from the DSM section of this decision. 2.3 Industrial sales deferral account YECL indicated that a new industrial customer, Whitehorse Copper Tailings (WHCT) was forecast to start operations in the fall of 2013, albeit the timing of the customer s startup was uncertain. Nevertheless, YECL submitted a WHCT load forecast of 1,025 megawatt-hours (MWh) for 2013 and 4,620 MWh in each of the remaining years of the test period. 26 YECL Application, page November 7, 2013 transcript, page 631, line 25 to page 632, lines 1-6 and page 632, lines Board Order Appendix A: Reasons for Decision Page 9 of 105

15 In consideration of the uncertainty surrounding the project and the magnitude of the load, YECL requested a deferral account relating to the WHCT sales uncertainty. YECL submitted that the proposed deferral account is intended: to capture the difference between WHCT net revenue on existing Rate 39 less forecast purchase power price applied to forecast sales, and WHCT net revenue on existing Rate 39 less forecast purchased power price applied to actual sales. 28 Subsequently, in its updated forecast, YECL submitted that WHCT project construction will not begin in 2013: WHCT is now hoping to build in late winter or early spring of 2014, which would require Yukon Electrical to provide construction power, with full electricity supply required for production required two to three months later. 29 When asked to provide an example wherein the Board allowed the creation of a deferral account that was related to a utility s forecast sales, YECL submitted that the YUB ordered the creation of a deferral account related to the sales of Yukon Energy to the Faro mine site under Rate Schedule YECL further clarified that Rate Schedule 34 was associated with the provision of site maintenance energy when Rate Schedule 39 was not in effect and no mining or milling activities were taking place Views of interveners With respect to Rate Schedule 34, UCG submitted that it understood that YEC collected revenues from the Federal Government for the ongoing shutdown and dewatering power requirements at the Faro mine site. 31 As such, UCG submitted that the Faro mine de-watering deferral account was a completely different account than the deferral account YECL was proposing. Furthermore, from UCG s standpoint, the proposed WHCT sales uncertainty deferral account transfers the risk of serving this industrial customer to non-industrial customers. UCG submitted that, given the delay in the startup of WHCT as an industrial customer, the impact of any forecast error during the test period would be minimal and there was no need for the deferral account. 32 YEC submitted that the implementation of a deferral account as proposed by YECL to address sales uncertainty is unprecedented in Yukon and materially shifts risk from the utility to all ratepayers. Referring to Rate Schedule 34, YEC submitted that the context for this deferral account was very different from what YECL is proposing in that it addressed the: post shut-down Faro mine situation where site maintenance energy was urgently required with no clear basis for any forecast of ongoing load. In this 28 YECL Application, pages 2-8, lines Exhibit B-11, YECL updates to GRA, October 31, 2013, page 8 of Information Responses, UCG-YECL 10(a). 31 UCG Final Argument, paragraph UCG Final Argument, paragraphs 111 to 112. Board Order Appendix A: Reasons for Decision Page 10 of 105

16 context, all of the net revenue benefits from the actual sales went 100% to the account of ratepayers. 33 YEC noted that YECL s updated filing acknowledged that the WHCT load would not materialize in However, while the filing updated other areas of the residential and commercial sales forecast, the industrial load forecast was not updated. Referring to YEC-YECL-6(d), 34 wherein YECL provided an example of the proposed deferral account calculation that assumed WHCT not operating in the test period, YEC pointed out that not updating the industrial load forecast allowed YECL to book $52,269 net income for 2013 with deferred collection from other customers without any risk 35 For these reasons, YEC recommended that YECL update its test period WHCT load forecast in the compliance filing. Further, YEC submitted that, under the current circumstances and based on the past precedent of the Faro site maintenance deferral account, if WHCT load were not included in the YECL revenue requirement, it was possible to consider a deferral account to deal with the WHCT load uncertainty. YEC concluded by stating that the above approach protects both YECL and all other ratepayers, and facilitates the WHCT load connection if and when this becomes possible. LE acknowledged and recommended that the Board approve YECL s proposed WHCT forecast sales deferral account. YECL acknowledged YEC s and LE s argument that its proposed WHCT forecast sales deferral account be accepted, while UCG s submission conversely suggested that there was no need for the deferral account. While agreeing with YEC that YEC s approach protects YECL and ratepayers, YECL noted that the latest available information suggests that WHCT will begin to take service in the spring of Noting UCG s submission that there was no need for the deferral account, YECL submitted that its proposal meets the deferral account criteria and will protect both YECL and ratepayers from significant variances that may arise regarding WHCT sales uncertainty Views of the Board Respecting rate schedule 34, the Board notes the UCG submission and agrees that the Faro mine de-watering deferral account is a completely different account than the deferral account, which YECL is proposing. The Board further notes that the standard criteria for the establishment of a deferral account include: (a) costs that are not under the control of the company and are not reasonably forecastable, or (b) where an error in forecasting could produce a loss or gain of a substantial magnitude. In its forecast update, YECL submitted that it expects to provide construction power in late winter or early spring of 2014 and full electricity supply for production two to three months later. In view of YECL s forecast update, the Board considers that WHCT startup is reasonably forecastable for 2014, and any forecasting error respecting the startup is minimal. Accordingly, the Board denies YECL s proposal for a deferral account related to WHCT 33 YEC Final Argument, page Exhibit B-7, YECL information responses, August 29, YEC Final Argument, page YECL Reply Argument, paragraphs 21 to 23. Board Order Appendix A: Reasons for Decision Page 11 of 105

17 sales uncertainty. The Board therefore, directs YECL in its compliance filing to reflect the Board s findings and to update the WHCT sales forecast. 3 PURCHASE POWER YECL submitted that its purchase power costs were to increase over the test period due to increased purchases resulting from sales load growth net of increased hydro generation at Fish Lake as a result of Unit #1 coming back into service in December The following table shows the actual and forecast purchase power over the period from 2008 to Table 3. Actual and forecast purchase power 2008 to 2015 ($000) Actuals Test Period Primary purchase 18,046 18,278 18,902 21,941 25,746 25,999 26,472 27,013 power Secondary 1, purchase power Shortfall Rider J 4,990 4,026 4,353 2,479 1, Less: capitalized 38 (69) - (346) (367) (402) (369) - - Total Purchase 24,157 23,211 23,462 24,093 26,923 25,630 26,472 27,013 Power Source: Application, page 3-1 YECL submitted that since the March 2010 catastrophic failure of Fish Lake unit #1, YECL has purchased approximately 93 percent of its required power supply from YEC. The remainder of YECL s power supply requirements has been provided by diesel generation and by hydro generation from Fish Lake unit #2. For the test period, YECL indicated that the percentage of its power supply requirements purchased from YEC is forecast to decrease slightly in 2013, and to decrease to approximately 91 percent in 2014 and 2015, as Fish Lake unit #1 comes back on-line near the end of YECL further clarified that the Fish Lake generation forecast in the test period was based on the Fish Lake base hydro generation of 8.73 GW.h, which was approved in Board Order , adjusted for downtime of unit #1 for YECL was asked to explain why the Fish Lake generation forecast should not be greater than what was approved in Board Order , considering that the Fish Lake infrastructure had been updated with current engineered standards and equipped with more efficient apparatuses. YECL submitted that historical averages related to Fish Lake from 1960 to 2012 indicate that 8.73 GW.h is higher than what should be forecast for the test period: 37 YECL Application, page 3-1, lines YECL was directed in Board Order to capitalize the incremental purchased power costs incurred due to Fish Lake rebuilds in 2008/2009. Consistent with this Order, YECL has capitalized the incremental purchase power costs incurred for the period in which Fish Lake unit #1 was out of service after the March 2010 catastrophic failure. 39 YECL Application, page 3-1, lines Board Order Appendix A: Reasons for Decision Page 12 of 105

18 1. The 50-year historical average is 8.48GWh; 2. Only two time periods (the 1960s and 1970s) exceed the 8.73GWh approved by the Board in Order ; and 3. There is a high variability in output with the lowest average 10-year output of 7.42GWh occurring in the time period. 40 Furthermore, YECL did not have any experience with the new equipment and it was not clear what the efficiency gain will be considering that any efficiency gains are subject to operational flows. YECL therefore submitted that the best forecast available for purposes of this application was to remain at the Board-approved 8.73 GW.h output. 41 When asked what Yukon ratepayers could expect in terms of benefits from the Fish Lake unit #1 turbine and building replacement project, YECL submitted that it expected an approximate 13-percent increase in output, $22,000 lower operating costs, and that the incremental cost of the unit would be paid back in a reasonable time frame 42. YECL added that, in future, the expected annual Fish Lake unit #1 generation output was 5.6 GW.h Views of interveners YEC agreed with YECL s proposal to remain with the Board-approved output of 8.73 GW.h per year for 2014 and Conversely, considering the expected efficiency gains, a: 13% increase from 5.6 GWh per year adds 0.73 GWh per year, and adding 0.73 GWh per year to the 50 year average of 8.48 GWh per year is 9.21 GWh per year. 45 LE submitted that a new long-term average generation level of 9.21 GW.h should be set for the Fish Lake hydro system. YECL reiterated its submission that that it did not have any actual experience with the newly installed equipment at Fish Lake and that the best forecast available for purposes of this application was to remain at the Board-approved output of 8.73 GW.h rather than decreasing the expected output at the Fish Lake facility to better match the historical average and then offsetting it with potential efficiency gains Views of the Board Considering the long-term averages submitted by YECL and the lack of clarity respecting the efficiency gains related to the installation of new equipment, the Board for purposes of this application accepts the 8.73 GW.h annual generation output for the test period. Accordingly, the Board rejects LE s submission that a new long-term 40 Information Responses, YUB-YECL-37 (d). 41 Information Responses, YUB-YECL-37 (d). 42 Information Responses, YEC-YECL-17 (c). 43 Information Responses,YEC-YECL-17 (d). 44 YEC Final Argument, page LE Final Argument, page YECL Reply Argument, paragraph 24. Board Order Appendix A: Reasons for Decision Page 13 of 105

19 average annual generation level of 9.21 GW.h should be set for the Fish Lake hydro system. 3.3 Capitalization of incremental purchase power when Fish Lake down YECL indicated that, consistent with Board Order , it was seeking to capitalize incremental purchase power costs that it had incurred for the period in which Fish Lake unit #1 was out of service as a result of the March 2010 catastrophic failure. 47 Responding to UCG-YECL-11 (a), YECL confirmed that it had incurred incremental purchase power costs of $346,000, $367,000, $402,000, and $369,000 respectively in 2010, 2011, 2012 and In the hearing, YECL confirmed that Board Order preceded the catastrophic failure of Fish Lake unit #1. When asked what part of the order applied to situations of catastrophic failure as well as of planned capital upgrades, YECL responded: The underlying substance-over-form of the situation was that Fish Lake was down as a result of a planned overhaul in 2008, and as a result of Decision , the additional purchase power that was required due to that planned overhaul in 2008 was ordered by this Board to be capitalized as part of that overhaul. The substance of the situation with regards to the catastrophic failure in 2010 is that the Fish Lake is down for being rebuilt; substance-over-form, the additional purchase power associated with Fish Lake being down has been capitalized. So it s, from our perspective, the exact same situation in both of those instances. 48 Furthermore, when asked about other instances where incremental purchase power costs resulting from unavailable generation due to a planned or unplanned outage had been capitalized, YECL affirmed that there were generation costs associated with the Carmacks-Stewart transmission line project (CSTP), which were incurred by YECL that were capitalized as part of the project. 49 Explaining how the incremental power costs incurred when Fish Lake unit #1 went out of service would have enduring benefits for ratepayers, YECL submitted that the capitalization of purchase power is just another input that is part of that overall cost to get Fish Lake up and running 50 Furthermore, these costs were incurred as part of the total capital project of rebuilding Fish Lake, which will have enduring benefits for ratepayers for many years to come and Yukon Electrical submits that the capitalization of these costs should be approved as filed YECL Application, page 3-1, footnote November 6, 2013 transcript, page 404, lines November 5, 2013 transcript, page 206, lines November 5, 2013 transcript, page 207, lines YECL Final Argument, paragraph 23. Board Order Appendix A: Reasons for Decision Page 14 of 105

20 3.3.1 Views of interveners LE submitted that the purchase power costs that resulted from the Fish Lake catastrophic failure were very different from the purchase power costs approved in Board Order LE disagreed with YECL s capitalizing all of the purchase power costs from March 2010 to December 2013, and suggested that most, if not all, of the purchase power costs that YECL has applied for in this application should be charged to the reserve for injuries and damages (RID). Furthermore, including: the purchase power cost in the capital cost of Fish Lake Unit #1 replacement artificially raises the capital cost of the project and the levelized cost of energy from the project. At most the downtime that would have been required for a planned replacement of the unit should be included in capital costs. 52 LE further submitted that only the purchase power costs that YECL incurred in 2013 should be approved for inclusion in the capital cost of Fish Lake unit #1 replacement. Accordingly, LE recommended that the Board direct YECL to calculate the purchase power cost for the three-year period of March 2010 the date of the catastrophic failure to December 31, 2012 and that this amount should be recovered from the reserve for RID or absorbed by YECL. Alternatively, LE recommended that the Board direct the entire purchase power cost from March 2010 to the December 2013 in-service date be recovered from the RID. 53 YECL acknowledged that charging incremental purchase power to the RID was an option to consider. However, YECL submitted that this option was not chosen due to Board Order and its direction to capitalize incremental purchased power. 54 Furthermore, whether the incremental power is charged to RID or YECL s preferred option has no effect in the long run, albeit the proposed option reduces the rate impact in the test years. 55 UCG noted that Board Order allowed the amortization of capital costs associated with the incremental purchase power costs because they were related to the rebuild which would have enduring benefits. Referring to YECL s submission that there were generation costs capitalized as part of the CSTP, UCG stated that there was no evidence on the record that validated this claim. Furthermore, the incremental purchased power costs incurred when Fish Lake was out of service served an immediate need just as any source of power might have in an emergency situation and does not provide enduring benefits to ratepayers. Accordingly, UCG submitted that these costs should not be capitalized. 56 YECL replied that Board Order directed YEC to include its own, as well as third party, generation costs in the determination of total costs associated with its capital 52 LE Final Argument, page LE Final Argument, page YECL Reply Argument, paragraph YECL Reply Argument, paragraph UCG Final Argument, paragraphs 124 to 126. Board Order Appendix A: Reasons for Decision Page 15 of 105