ENMAX Power Corporation

Transcription

1 Decision D ENMAX Power Corporation Transmission General Tariff Application December 4, 2017

2 Alberta Utilities Commission Decision D ENMAX Power Corporation Transmission General Tariff Application Proceeding December 4, 2017 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 summary Introduction Revenue requirement and application overview Responses to previous Commission directions Directives from Decision versus s Transmission rate base and return Transmission return on rate base Cost of debt, interest expense and over borrowing No-cost capital Transmission opening rate base Asset Replacement and Modification projects AESO Direct Assigned and Distribution Driven Transmission projects AESO System projects Distribution Driven Transmission projects Externally Driven Transmission Modification projects Relocation projects Generator Interconnection projects Transmission Information Technology projects Transmission General Plant projects Other projects Allocated Common Property Plant and Equipment projects Common Information Technology projects Common General Plant projects Common Other projects Allocated Corporate Property Plant and Equipment projects Corporate Information Technology projects Corporate General Plant projects Forecast 2016 and 2017 capital additions Asset Replacement and Modification projects AESO Direct Assigned and Distribution Driven Transmission projects AESO System projects Distribution Driven Transmission projects Externally Driven Transmission Modification projects Relocation projects Generator Interconnection projects Transmission Information Technology projects General Plant projects Other projects Allocated Common and Corporate Property Plant and Equipment projects Other capital-related matters Capital adjustment and dismantling expense entries Capitalized administrative overhead Decision D (December 4, 2017) i

4 6.7 Transmission necessary working capital Reserve and deferral accounts Transmission hearing cost reserve account Direct assigned capital deferral account Major storms and natural disasters deferral account Average Variable Pay Program reserve account Depreciation and amortization expense Decommissioning costs for substations 12 and Operation and maintenance costs Direct operations and maintenance costs Staffing levels Full-time equivalents Vacancy rates Salary escalation Incentive plans Average Variable Pay Program Medium-Term Incentive Plan Long-Term Incentive Plan Pension and benefits Employee benefits Registered Pension Plan Supplemental Retirement Plan Post-retirement benefits Non-labour escalation Transmission revenue offsets Common and corporate allocations ENMAX Corporation corporate shared services cost allocations EPC common operation cost allocations Corporate and common general property plant and equipment Need for a simultaneous examination of distribution and transmission allocations Affiliate transactions Filing requirements Rule 005 submissions Filing requirements for capital-related information MFR schedules Order Appendix 1 Proceeding participants Appendix 2 Summary of Commission directions List of tables Table 1. EPC transmission, approved and revenue requirement... 2 ii Decision D (December 4, 2017)

5 Table 2. EPC transmission major components of the revenue requirement... 4 Table 3. EPC transmission capital expenditures and capital additions for the years Table 4. ENMAX Corporation corporate ACFA rate... 9 Table 5. EPC transmission mid-year no cost capital Table 6. Table 7. Table 8. Table 9. EPC transmission 2014 and approved and capital additions by program EPC transmission 2014 and approved and capital additions AESO System projects EPC transmission 2014 and approved and capital additions DDTP projects EPC transmission 2014 and approved and relocation project capital additions Relocation projects Table 10. EPC transmission 2014 and approved and capital additions Generator Interconnection projects Table 11. EPC transmission 2014 and approved and transmission capital additions IT projects Table 12. EPC transmission 2014 and and capital additions General Plant projects Table 13. EPC transmission 2014 and and capital additions Other projects Table 14. EPC transmission 2014 and and capital additions Common IT projects Table 15. EPC transmission 2014 and and capital additions Common General Plant projects Table 16. EPC transmission summary of capital additions Common General Plant SSC projects Table 17. EPC transmission 2014 and and capital additions Common Other projects Table 18. EPC transmission 2014 and and capital additions Corporate PP&E projects Table 19. EPC transmission 2014 and and capital additions Corporate IT projects Decision D (December 4, 2017) iii

6 Table 20. EPC transmission 2014 and and capital additions Corporate General Plant projects Table 21. EPC transmission 2016 and 2017 capital additions by program Table 22. EPC transmission 2016 and 2017 capital additions AESO System projects Table 23. EPC transmission 2016 and 2017 capital additions DDTPs Table 24. EPC transmission calculation of surplus transmission investment in DDTPs Table 25. EPC transmission 2016 and 2017 capital additions transmission Relocation projects Table 26. EPC transmission 2016 and 2017 capital additions Generator Interconnection projects Table 27. EPC transmission 2016 and 2017 capital additions Transmission Software projects Table 28. EPC transmission 2016 and 2017 capital additions General Plant Table 29. EPC transmission 2016 and 2017 capital additions Substation Building Upgrades Table 30. EPC transmission 2016 and 2017 capital additions Other projects Table 31. EPC transmission 2016 and 2017 capital additions allocated Common IT projects Table 32. EPC transmission 2016 and 2017 capital additions allocated Common General Plant projects Table 33. EPC transmission 2016 and 2017 capital additions allocated Common Other projects Table 34. EPC transmission 2016 and 2017 capital additions allocated Corporate IT projects Table 35. EPC transmission 2016 and 2017 capital additions allocated Corporate General Plant projects Table 36. EPC transmission necessary working capital Table 37. EPC transmission deferral accounts Table 38. EPC transmission hearing costs Table 39. EPC transmission summary of depreciation and amortization expense Table 40. EPC transmission total operating expenses iv Decision D (December 4, 2017)

7 Table 41. Comparison of to operating expenses Table 42. EPC transmission direct O&M cost breakdown Table 43. EPC transmission FTEs and vacancy rates Table 44. EPC Transmission breakdown of FTE increase in Table 45. EPC Transmission salary inflation Table 46. Comparison of Alberta utilities bargaining units negotiated salary increases for the test period Table 47. EPC transmission variable pay expenses Table 48. EPC transmission historical AVPP payout Table 49. ENMAX Corporation historical LTVPP payout Table 50. EPC transmission pension and benefits expense Table 51. ENMAX Corporation employer paid benefits included in the fringe calculation Table 52. EPC transmission total DB employer contributions Table 53. Alberta CPI historical s and s Table 54. Alberta CPI 2017 based on a consensus (average) of available external s Table 55. EPC transmission revenue offsets detailed breakdown Table 56. EPC transmission cost allocators for CSS costs and common costs Table 57. EPC transmission corporate costs by ledger account category Table 58. EPC transmission common costs by ledger account category Table 59. EPC transmission allocated Corporate General PP&E capital additions Table 60. EPC transmission allocated Common General PP&E capital additions Table 61. EPC transmission depreciation and capital additions for Corporate and Common General PPE Table 62. EPC transmission ratio of distribution and transmission rate base Decision D (December 4, 2017) v

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9 Alberta Utilities Commission Calgary, Alberta ENMAX Power Corporation Decision D Transmission General Tariff Application Proceeding Decision summary 1. This decision provides the Alberta Utilities Commission s determinations regarding ENMAX Power Corporation s (EPC) application for approval of its transmission general tariff application (the application, or GTA). 2. For the reasons set forth in this decision, the Commission approves EPC s application, subject to a number of directions, including: The use of 2016 results for the purpose of establishing EPC s 2016 revenue requirement, with the exception of s related to capital s and expenditures. EPC to reflect EPC s transmission function investment in Distribution Driven Transmission projects (DDTPs) at an amount no greater than the maximum available investment under the Alberta Electric System Operator (AESO) tariff as shown on an applicable customer contribution decisions (CCDs). EPC to provide the Commission with further information on Relocation Program or Project contributions under the terms of its Municipal Consent and Access Agreement (MCAA) with The City of Calgary (the City) at the time of its next GTA. EPC to remove the effect of the capitalized overhead increases for administrative overhead expense and engineering, supervision and general expense from its 2016 and 2017 s. That EPC s 2017 full-time equivalents (FTEs) reflect 2016 FTEs as the base amount. 3. The Commission orders EPC to refile its application by January 8, 2018, to reflect the Commission's findings and conclusions set out in this decision, and to provide additional evidence in support of the 2017 International Brotherhood of Electrical Workers (IBEW) salary escalator as discussed in greater detail below. 2 Introduction 4. On December 9, 2016, EPC filed an application with the Alberta Utilities Commission for various approvals associated with its transmission facility owner (TFO) function for the 2016 and 2017 test period. In this decision, the Commission has referred to EPC s application as a general tariff application, or GTA. Decision D (December 4, 2017) 1

10 5. Specifically, EPC is requesting approval of: 1 Table 1. The transmission tariff to be paid by the AESO for the use of EPC s transmission facilities over the test period. The tariff is based on EPC s transmission revenue requirement 2 as presented below: EPC transmission, approved and revenue requirement approved ($ million) Revenue requirement Increase from previous year Annual increase 1% 10% Source: Exhibit , EPC-AUC-2017JAN attachment, updated GTA schedules, Schedule 3-1. Revenue requirement calculated as total revenues shown on line 7 less deferral accounts shown on line 3. Continuation of the depreciation rates approved in decisions and D The 2016 opening balance for transmission net rate base. Forecast capital expenditures, capital additions and net rate base for the 2016 and 2017 test period. Continuation of the allocation of common operations, and corporate administration and general (shared services) costs to transmission based on methodologies approved in decisions and D01-. Continuation of the transmission reserve and deferral accounts that were approved in decisions and D01- as follows: 5 o hearing cost reserve account o direct assigned capital deferral account (DACDA) o major storms and natural disaster deferral account Any further orders, declarations or exemptions necessary to give effect to the transmission tariff for the 2016 and 2017 test periods. 6. On December 13, 2016, the Commission issued notice of EPC s application. The notice of application required that any party who wished to participate in this proceeding submit a statement of intent to participate (SIP) to the Commission by December 29, Exhibit , application, paragraph Exhibit , EPC-AUC-2017JAN attachment, updated GTA schedules, Schedule 3-1, line 7 excluding deferral account amounts shown on line 3. 3 Decision : ENMAX Power Corporation: 2014 Phase I Distribution Tariff Application, Transmission General Tariff Application, Proceeding 2739, Application , December 16, Decision D01-: ENMAX Power Corporation, 2014 Phase I Distribution Tariff Application and Transmission General Tariff Application Compliance Filing, Proceeding 20124, August 11,. 5 Exhibit X0001, application, Table 32-1, PDF page Decision D (December 4, 2017)

11 7. The Commission received SIPs from the following parties: AltaLink Management Ltd. (AltaLink) the Consumers Coalition of Alberta (CCA) the Office of the Utilities Consumer Advocate (UCA) EPCOR Distribution and Transmission Inc. (EDTI) 8. Of those parties who filed SIPs, the UCA and the CCA actively participated in the proceeding. 9. Through a series of letters, 6 the Commission established the following schedule: Process step Deadline Information requests (IRs) to EPC round 1 January 27, 2017 IR responses from EPC round 1 March 2, 2017 Submissions on further process March 7, 2017 IRs to EPC round 2 March 29, 2017 IR responses from EPC round 2 April 27, 2017 Intervener evidence June 22, 2017 IRs to interveners July 7, 2017 IR responses from interveners July 21, 2017 Rebuttal evidence August 4, 2017 Argument August 21, 2017 Reply argument September 5, During the course of the proceeding, EPC requested and was granted confidential treatment for: Three business cases to be filed on the record with respect to substation security and substation security fencing that contained sensitive information. 7 Responses to certain IRs in relation to seven affiliate decision records (ADR) packages that contained competitively-sourced bidding information in relation to procurement services The Commission has determined that no specific references to the confidential information is necessary for the purposes of this decision. Accordingly, no separate confidential decision or redacted decision will be issued in this proceeding. 12. The Commission considers the close of the record for this proceeding to be September 5, Exhibits X0027, X0032, X0033, X0040, X0126, X0142, X0164 and X Exhibit X0036, EPC request for confidentiality and Exhibit X0040, AUC ruling on EPC request for confidentiality. 8 Exhibit X0107, EPC request for confidentiality for IR response to Exhibit X0030, EPC-UCA- 2017JAN27-028(c, d); Exhibit X0108; and Exhibit X0125, AUC ruling on EPC request for confidentiality. Decision D (December 4, 2017) 3

12 13. 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 and arguments 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 related 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 a particular matter. If a matter or request for approval included in EPC s application is not specifically addressed in the findings, that matter or request is considered approved for the purposes of this decision. 3 Revenue requirement and application overview 14. The following table provides a high-level summary of the updated transmission revenue requirement requested by EPC for the test period: Table 2. EPC transmission major components of the revenue requirement approved Per cent of revenue requirement 2016 Per cent of revenue requirement 2017 Per cent of revenue requirement ($ million) (%) ($ million) (%) ($ million) (%) Operating & maintenance costs Depreciation Return on rate base Income tax expense Revenue offsets (0.3) (0.4) (0.7) (0.9) (0.7) (0.9) Total revenue requirement Source: Exhibit , EPC-AUC-2017JAN attachment, updated GTA schedules, Schedule 3-1, lines With respect to 2016 s, when compared to approved amounts, EPC described the $3.9 million decrease in operating and maintenance (O&M) costs as related to less maintenance project costs, a decrease in the hearing costs reserve accounts, lower consulting fees, higher vehicle recoveries and reductions to various general O&M costs. The higher depreciation expense of $1.1 million was due to differences in the asset mix compared to s and differences in the timing of assets placed into service in 2014 and The increase of $4.2 million in return on rate base was due mainly to higher 2016 mid-year rate base, a higher equity return and higher equity capital structure stemming from the Generic Cost of Capital (GCOC) Decision D With respect to 2017 s, when compared with approved amounts, EPC described the $0.8 million decrease in O&M costs as related to carry-over reductions from 2016 offset by increases in FTEs and overall labour escalations associated with the union agreement. The higher depreciation expense of $2.7 million was again due to differences in the asset mix compared to s and differences in the timing of assets placed into service. The increase of $6.1 million in return on rate base was due mainly to higher 2017 mid-year rate base, 9 Decision D : 2016 Generic Cost of Capital, Proceeding 20622, October 7, Decision D (December 4, 2017)

13 a higher equity return and higher equity capital structure stemming from the GCOC Decision D The following table provides a summary of the updated capital expenditures and capital additions for the test period: Table 3. EPC transmission capital expenditures and capital additions for the years approved 2016 ($ million) 2017 Capital expenditures (cap ex) Capital additions (cap add) Source: Exhibit X0044, EPC-AUC-2017JAN attachment, updated GTA schedules, Schedule 10-4, line Responses to previous Commission directions 4.1 Directives from Decision In Decision respecting EPC s 2014 Phase I distribution tariff application and transmission GTA, the Commission provided 48 directions to EPC. In its compliance filing to Decision , EPC responded to these directions or identified the future proceedings in which the Commission s directions would be addressed. 19. In Decision D01-, which related to EPC s compliance filing, the Commission found that directions 6, 17 and 19 remained outstanding and needed to be addressed in future transmission applications EPC provided an update to all Commission directions that had not been addressed in previous decisions in Section 2 of the application. Based on the information and responses in EPC s application, the Commission considers that EPC has complied with directions 6, 17 and versus s 21. As noted above, EPC originally submitted the application on December 9, EPC stated that due to the timing of the preparation of financial schedules relied on in its application, EPC s 2016 revenue requirement was composed of data for the months January through May 2016, and data for the remainder of At the time of its IR responses in March and again with respect to its second round IR responses in April 2017, 14 EPC indicated that it did not have the information available to update tables and schedules in the application to include 2016 results. EPC stated that its 10 Exhibit X0043, EPC-AUC-2017JAN attachment. 11 Directions 12 and 13 also remained outstanding and applied to future distribution applications. 12 Exhibit , application, PDF page Exhibit X0099, EPC-UCA-2017JAN27-014, PDF page Exhibit X0151, EPC-UCA-2017MAR29-008, PDF page 14. Decision D (December 4, 2017) 5

14 s would be filed in EPC s Rule filing, and that EPC had requested an extension to June 1, 2017 for its Rule 005 filling. 23. The CCA requested a period of two weeks after the 2016 Rule 005 filing for the submission of intervener evidence. 16 On May 9, 2017, the Commission established a further process schedule that included a deadline of June 15, 2017, for the filling of intervener evidence. 24. EPC ultimately submitted its 2016 Rule 005 filing on June 8, 2017, and in a letter issued on the same day, the Commission extended the deadline for the filing of intervener evidence to June 22, In evidence submitted on behalf of the UCA, Mr. Bell recommended that the AUC should only include 2016 O&M in rates, 18 which represented a 10 per cent reduction (based on comparing 2016 to costs) that should be carried forward into Mr. Bell also recommended that 2016 capital additions be used in place of the original 2016 amounts. 19 Mr. Bell referenced several prior Commission decisions and submitted that the Commission consistently prefers to rely on the most current information in rendering its decisions In rebuttal, EPC responded to the UCA s recommendation that the Commission use 2016 s, rather than 2016 s, in relation to its 2016 capital and O&M expenditures. EPC commented that it had not provided an update to its application for 2016 s as it had not been directed or requested to do so. EPC stated that it would be wholly appropriate for the Commission to rely on 2016 and 2017 s for setting the transmission rates on a prospective basis In argument, the UCA recommended the use of 2016 O&M and capital results for inclusion in rates consistent with Mr. Bell s evidence, stating that the history of the Commission is to use the best available information at the time it renders its decision. 22 Further, the UCA concluded that the 2017 for O&M must be reduced by at least 10 per cent, given the cost reductions observed with respect to 2016 results. 28. EPC argued that it had achieved anomalous and unsustainable one-time O&M reductions in 2016 and it would be unreasonable and prejudicial to EPC to carry these O&M reductions forward into its 2017 revenue requirement. 23 Commission findings 29. In accordance with the principles of prospective-ratemaking, the Commission generally sets rates on the basis of test years and assesses the s provided in support of a 15 Rule 005: Annual Reporting Requirements of Financial and Operational Results. 16 Exhibit X0163, CCA correspondence regarding evidence. 17 Exhibit X0166, AUC letter CCA request for extension to file intervener evidence and updated process schedule. 18 Exhibit X , UCA evidence, Q&A Exhibit X , UCA evidence, Q&A Exhibit X , UCA evidence, Q&A 22 and Q&A Exhibit X0179, EPC rebuttal, paragraphs Exhibit X0182, UCA argument, paragraph Exhibit X0183, EPC argument, paragraphs Decision D (December 4, 2017)

15 rate application. However, as discussed in Decision 2957-D01-, 24 for example, for years in which results are available, the Commission may ignore the s and approve the revenue requirement as submitted, or it may approve and use the results as the revenue requirement, having assessed the in light of the results. As noted by Mr. Bell in his evidence on behalf of the UCA, the Commission has used amounts in approving revenue requirements in past general tariff applications for other utilities. The Commission notes that it has previously expressed a preference, under a specific set of circumstances, for considering the most up to date or best available information in making its decisions. 30. The Commission sets rates on a prospective basis; however, situations of regulatory lag arise, where approvals of revenue requirements for certain years of a test period are made after those years have passed. EPC filed its 2016 s in its Rule 005 submissions on June 8, In establishing EPC s revenue requirement for 2016, with the exception of any related to capital expenditures and capital additions and any amount that is affected by findings or directions contained elsewhere in this decision, the Commission considers these results should be used as the approved amounts for that year. 31. The Commission considers that EPC s capital expenditures and additions will be tested for prudence at the time of EPC s next GTA or within a future proceeding established specifically for the examination of DACDA related projects. 32. Given the above findings, the Commission directs EPC in its compliance filing to this decision to use the amounts for 2016 with the capital-related exceptions noted above and further, any 2016 amount that would be affected by findings or directions contained elsewhere in this decision. The Commission addresses the use of 2016 s in relation to the 2017 s, and the UCA s recommendation with respect to carrying over certain reductions from 2016, in later sections of this decision. 6 Transmission rate base and return 6.1 Transmission return on rate base 33. At the time of its application, EPC applied the return on equity (ROE) and deemed equity ratio from the most recent GCOC decision Decision D The ROE percentages used for 2016 and 2017 were 8.30 per cent and 8.50 per cent, respectively. However, a deemed equity ratio of 37 per cent was used on a placeholder basis pending the outcome of Proceeding EPC GCOC compliance filing to Decision D In Decision D , 26 which addressed EPC s application for finalization of its deemed equity ratio for , 27 paragraph 82 stated: 24 Decision 2957-D01-: Direct Energy Regulated Services, Default Rate Tariff and Regulated Rate Tariff, Proceeding 2957, Application , July 7,. 25 Exhibit X0001, application, paragraph Decision D : ENMAX Power Corporation, Application for Finalization of Deemed Equity Ratio for , Proceeding 22211, July 27, Proceeding 22211, EPC application for finalization of deemed equity ratio for Decision D (December 4, 2017) 7

16 82. Currently, ENMAX has a transmission general tariff application that is being processed by the Commission. As part of its decision on that application, the Commission will provide directions to ENMAX transmission with respect to implementing the final approved deemed equity ratio for 2016 and 2017 determined in this decision. 35. In its argument 28 in this proceeding, EPC confirmed that in Decision D , the Commission established a final approved deemed equity ratio for EPC s transmission function of 36 per cent for the years 2016 and EPC proposed to adjust its return for these years by incorporating the final approved deemed equity ratio of 36 per cent in its compliance filing to this decision. Commission findings 36. The Commission finds that EPC has used the approved ROE of 8.30 and 8.50 per cent for the years 2016 and 2017, respectively. 37. Given the timing of Decision D in relation to this proceeding, the Commission is satisfied with EPC s proposal to implement the Commission findings regarding EPC s transmission function in Decision D The Commission accepts EPC s proposal to adjust its return for the final approved deemed equity ratio of 36 per cent for the years 2016 and 2017 in its compliance filing to this decision. 6.2 Cost of debt, interest expense and over borrowing 38. EPC s debt costs are based on its weighted average embedded cost of debt. EPC obtains its debt through the Alberta Capital Financing Authority (ACFA), which is a provincial authority which acts only as an agent of the Alberta crown. Its business is to provide local entities with financing for capital projects. The ACFA is able to borrow in capital markets at interest rates that may not be available to local authorities acting independently. The ACFA makes loans to Alberta municipalities, school boards and other local entities at interest rates based on the cost of its borrowings. The City adds a 0.25 per cent administrative fee 29 to any ACFA debt issuances. Long-term debt 39. In the second quarter of 2016, EPC identified an inadvertent drop in its equity ratio below the 2013 GCOC deemed equity ratio. EPC made the decision to not issue debt in 2016 to prevent further deterioration of the equity ratio. 30 However, EPC stated that it retains the right to meet its funding requirements through any combination of internal and/or external ACFA funding as required EPC stated that it may require access to ACFA funding to fund its 2017 distribution and transmission capital spend of $217.8 million ($66.8 million of which pertains to transmission-related expenditures). EPC indicated that it may submit an ACFA funding request 28 Exhibit X0183, EPC argument, paragraph Exhibit X0001, application, paragraphs Exhibit X0001, application, paragraph Exhibit X0001, application, paragraph Decision D (December 4, 2017)

17 to the City before the end of EPC is ing an embedded cost of long-term debt of 3.93 per cent and 3.82 per cent for 2016 and 2017, respectively Borrowing rates are for 2016 and 2017 by taking the April 1, 2016 and August 1, 2016 spot rates listed on the ACFA website. The following table provides the terms and interest rates (including the City s 0.25 per cent administrative fee) for EPC s new debt issuances for the transmission utility: 34 Table 4. Term (years) ENMAX Corporation corporate ACFA rate 2014A ACFA rate A ACFA rate 2016F ACFA rate Apr 1/ F ACFA rate Aug 1/2016 (%) Source: Exhibit , application, Table 28-1, paragraph EPC submitted that it finances debt in five-, 10-, 20- and 25-year terms in order to match the life of the assets for which the funding is required. 35 Short-term debt 43. EPC explained that its short-term debt consists of intercompany loans and the interest incurred on those loans. EPC uses a cash concentration system held by ENMAX Corporation from which EPC can borrow or lend funds depending upon whether its operating account is positive or negative. EPC indicated that it uses the Canadian Dealer Offered rate for short-term debt balances and for short-term cash credit balances EPC stated that because the funds for the cash concentration system are aggregated daily, it cannot monitor what these funds are financing on a transactional basis, but confirmed that all funds received or paid are related to transactions occurring within the ordinary course of business. 37 Interest expense and borrowing costs 45. The CCA explored the issue of interest expense and over-borrowing during the proceeding. Its main concern was whether EPC uses the most economical debt issuance practice. The CCA asserted that EPC did not issue debt in a manner to reduce cost, making the debt issuance imprudent In evidence, Mr. Thygesen, on behalf of the CCA, questioned EPC s need to carry as much as $128 million in cash in 2016, given EPC s stated intention to match its capital spending 32 Exhibit X0001, application, paragraph Exhibit X0001, application, paragraph Exhibit X0001, application, paragraphs Exhibit X0001, application, paragraph Exhibit X0001, application, paragraphs Exhibit X0001, application, paragraph Exhibit X0180, CCA argument, paragraphs 15 and 19. Decision D (December 4, 2017) 9

18 and capital funding requirements and the amount of cash it carries. Mr. Thygesen cited one of EPC s internal presentation documents, which indicated that EPC s source of cash was over financing and that there was a need to reduce transmission and distribution cash and bring its balance sheet in line with the deemed 61:39 debt to equity ratio and capital structure. 39 Mr. Thygesen stated that excess cash results in a much higher interest rate being charged on capital. Mr. Thygesen added that, based on evidence in an internal document, EPC distribution changed its behaviour, but EPC transmission ly increased its cash balances the opposite of what was recommended. Mr. Thygesen asserted that EPC did not need to borrow funds for its transmission entity between 2014 and To support his claims, Mr. Thygesen performed calculations depicting what would have happened to short-term debt balances if EPC had not issued long-term debt in 2014 and. Mr. Thygesen stated that these calculations show that EPC used a higher embedded cost of debt rate for capitalizing asset additions for, which then went into the 2016 opening rate base balances. Mr. Thygesen asserted that the difference between EPC s average cost of debt of per cent, as shown in Schedule 2.3 of EPC s 2016 Rule 005 filings, and his calculated rate of 3.72 per cent should be disallowed in opening rate base. 41 He asserted that EPC, in its compliance filing, should be directed to use a 3.72 per cent embedded cost rate for and flow the pro rata reduction to EPC s 2016 opening rate base The CCA emphasized that Mr. Thygesen is not advocating the use of only short-term debt, but rather, that short-term debt can and should be used to minimize costs up to the point where it becomes prudent to begin using long-term debt (as Mr. Thygesen asserted is EPC distribution s practice) Mr. Thygesen stated that, since EPC ended 2016 with $113 million in cash, EPC should have to demonstrate that it will use this cash balance before the end of He also stated that if EPC could not produce a more prudent use of the $113 million in cash, the embedded cost of debt of 3.44 per cent, as calculated by Mr. Thygesen in his evidence, should be used for both 2016 and As an alternative, he suggested the use of a deferral account to true up the differences between and cost of debt Mr. Thygesen also argued that, although he is in support of the practice of crediting customers with the interest earned on surplus cash (through revenue offsets), EPC is not crediting customers in a way that offsets the interest costs and the embedded cost of debt. Mr. Thygesen explained that EPC is not giving customers the interest earned credit shown in Schedule 2.3 of Rule 005 Filings and is, therefore, overcharging customers through an inflated cost of debt. Mr. Thygesen recommended that in future any interest be offset against interest expense in Schedule 2.3 and the determination of the embedded cost of debt In rebuttal, EPC stated that a higher amount of borrowing does not result in a higher amount of interest being paid because customers pay the deemed interest, not interest, 39 Exhibit X0167, CCA evidence, paragraphs Exhibit X0167, CCA evidence, paragraphs Exhibit X0167, CCA evidence, paragraphs Exhibit X0167, CCA evidence, paragraph 30; Exhibit X0180, CCA argument, paragraph Exhibit X0167, CCA evidence, paragraph Exhibit X0167, CCA evidence, paragraphs and Exhibit X0167, CCA evidence, paragraphs Decision D (December 4, 2017)

19 through the approved tariff. EPC also added that debt practices are outside the scope of cost of service applications and are better reviewed within a GCOC proceeding. 46 EPC explained 47 that these issues were previously examined in the ATCO Gas capital tracker application (Proceeding 21843): as referenced by EPC in the following two paragraphs 151. The CCA s evidence centers around the claim that ATCO Gas is overcharging its customers due to higher levels of debt than are required, with the implication that the company s incurred cost of debt was not reasonable. The CCA objected to what it perceived to be the additional interest expense that occurs due to more borrowing than is required. With respect to this issue, the Commission accepts ATCO Gas s explanation that a higher amount of borrowing does not result in a higher amount of interest expensed and passed on to customers. For ratemaking purposes, the volume of debt is based on the approved deemed, not, capital structure. The deemed capital structure determines the proportions of the mid-year rate base financed by equity and debt The Commission reiterates its findings in Decision D that a capital tracker true-up application is not the forum to review debt issuance practices. While the Commission acknowledges that a company s practices with respect to debt issuances affect the embedded debt cost rate, also referred to as the WACD, [weighted average cost of debt] (for example, through targeting the mix of the long-term and shortterm debt issuances or the timing of issuance or mirroring of debt cost from the corporate parent), a capital tracker true-up application is not the forum to review these practices because they concern financing the entire utility operations, including operating and maintenance costs and the capital costs under I-X. In the Commission s view, a general review of the utilities debt practices is better suited for examination in a GCOC proceeding EPC asserted that long-lived assets should be financed using long-term debt where the term of the debt reasonably matches the expected life of the asset. EPC also countered that, had EPC used cash on hand to fund its capital expenditures as the CCA recommended, EPC s capital structure would have deviated from its deemed capital structure In argument, the CCA reiterated its claim that EPC does not match its borrowing strategy to cover its funding requirements, given that EPC held $113 million in cash on December 31, 2016 (or 72 per cent of its deemed equity). The CCA stated that EPC s actions to issue a dividend payment in to reduce a perceived excess cash balance was disingenuous, as EPC cash balances ly showed an increase on its balance sheet. The CCA highlighted that in, EPC was operating 500 basis points lower than the approved deemed equity level The CCA argued that EPC was incorrect in their assertion that higher borrowing does not result in higher interest. The CCA explained that a practice of higher borrowing than is required 46 Exhibit X0179, EPC rebuttal, paragraphs Exhibit X0183, EPC argument, paragraph 138 referencing paragraph 151 of Decision D : ATCO Gas and Pipelines Ltd. Capital Tracker True-up and 2017 Steel Mains Replacement Forecast Update Application, Proceeding 21843, June 12, 2017, and paragraph 140 referencing paragraph 154 of Decision D Decision D , paragraphs 151 and Exhibit X0179, EPC rebuttal, paragraphs Exhibit X0180, CCA argument, paragraphs 2 and 5-7. Decision D (December 4, 2017) 11

20 generates extra interest expense and a cash surplus. EPC could instead use this cash surplus to pay down debt, which would then reduce interest expense The CCA asserted that because EPC has failed to provide the lowest cost financing at the best terms available, the debt rate of 3.72 per cent calculated by Mr. Thygesen should be used, and the amount of $0.776 million, which represented imprudent and excessive incurred interest charges, should be used to reduce the 2016 opening rate base on a pro-rata basis to the extent that the interest was capitalized. He stated that the corresponding amount of imprudent and excessive interest for 2016 should similarly reduce the 2016 closing rate base Finally, the CCA disagreed with EPC that the issue of debt practices was not a matter for review in this type of proceeding. The CCA stated that interest is a cost of utility operation and that the Commission consistently approves debt rates within GTAs In argument, EPC stated that it does not finance with short-term debt, as this practice would be speculative, imprudent and inconsistent with past regulator-approved practices. EPC stated that its long-term borrowing approach is consistent with the long-standing and prudent financing practice of matching the term of the debt to the expected life of the asset being financed EPC stated that its allocation of new debt between distribution and transmission is based on capital spending for each business unit. This debt level is adjusted annually to reflect the capital spending and is maintained at the approved deemed capital structure In reply argument, the CCA stated that EPC s argument for not using short-term debt is questionable, as EPC already issues debt on a five-year term. 56 The CCA agreed with EPC that the interest included in the tariff is the deemed expense, as stated in Proceeding 21843, but countered that the CCA did not provide evidence in Proceeding showing the effect of a changed debt issuance policy on the deemed rate; whereas, it has provided such evidence in this proceeding The CCA also referred to the Commission s findings from Decision Stand- Alone Study, which stated that the directors and management have responsibilities to ratepayers that include accessing the lowest cost financing at the best terms available to finance utility operations In reply argument, EPC asserted that the CCA s argument that EPC consciously overfinanced (based on the internal document it cited which discussed over-financing) was erroneous, as the document was related to the decision to issue a dividend in and did not regard over financing in general. 59 EPC also stated that the CCA was incorrect when it stated that 51 Exhibit X0180, CCA argument, paragraph Exhibit X0180, CCA argument, paragraph Exhibit X0180, CCA argument, paragraph Exhibit X0183, EPC argument, paragraph Exhibit X0183, EPC argument, paragraph Exhibit X0186, CCA reply argument, paragraphs Exhibit X0186, CCA reply argument, paragraph Decision : ATCO Electric Ltd., Stand-Alone Study, Proceeding 18, Application , October 21, Exhibit X0187, EPC reply argument, paragraph Decision D (December 4, 2017)

21 EPC distribution used low-cost, short-term debt to finance capital, and that EPC transmission should do the same. EPC confirmed that both distribution and transmission businesses finance capital using long-term debt accessed indirectly through the ACFA EPC disagreed with the CCA s claim of overcharging customers by $2.085 million 61 in interest expense and the CCA s reference to the passage in Decision , which stated that the utility has a responsibility to access the lowest cost financing at the best terms available. EPC disagreed with the CCA s interpretation of Decision , stating that this passage does not mean that a utility should finance long-lived assets with short-term debt if short-term interest rates are lower than long-term rates at the time financing is required EPC argued that the practice of matching the term of debt to the life of the assets being financed is a long-standing and Commission-approved utility practice, which existed before Decision and continued long after. EPC referred to its GTA as an example where the Commission approved EPC s of new debt in 5-, 10-, 20- and 25-year terms; terms that matched the life of its assets EPC also disagreed with the CCA s statement that it has not raised any cost of capital related issues that would be better suited to the established generic process. EPC argued that the CCA s issues are not just about interest, but also about a long-standing principle of matching assets lives being financed to the term of the debt and whether utilities should accelerate payment using cash. 64 EPC asserted that its cost of debt was well supported and reasonable and should be approved as filed. 65 Commission findings 65. In Proceeding 2739 EPC s GTA, EPC indicated that it was applying for a cost of debt it expected to issue for 2014 and. In argument, no party addressed EPC s cost of debt. 66 In Proceeding EPC s application to issue debt, the Commission approved EPC s debt issuance for. 67 In approving this debt issuance, the Commission considered Section 101(2)(a)(ii) of the Public Utilities Act: 101(2) No owner of a public utility designated under subsection (1) shall (a) issue any (ii) bonds or other evidences of indebtedness, payable in more than one year from the date of them, 60 Exhibit X0187, EPC reply argument, paragraph Exhibit X0178, CCA-AUC-2017JUL07-010(a, b). Calculated as: $0.776 million $1.309 million, PDF page Exhibit X0187, EPC reply argument, paragraph Exhibit X0187, EPC reply argument, paragraphs Exhibit X0187, EPC reply argument, paragraph Exhibit X0183, EPC argument, paragraphs Decision , paragraph Decision D01-: ENMAX Power Corporation, Application to Issue Debt, Proceeding 20294, May 29,, paragraph 30. Decision D (December 4, 2017) 13

22 unless it has first satisfied the Commission that the proposed issue is to be made in accordance with law and has obtained the approval of the Commission for the purposes of the issue and an order of the Commission authorizing the issue, After reviewing EPC s debt application, the Commission found the debt issuance to be in the public interest and for the purposes of financing assets or activities in the operation of a public utility. The Commission also found that EPC met the requirements of Section 101(2)(a)(ii) of the Public Utilities Act The Commission has reviewed the CCA s recommendation to revise EPC s embedded cost of debt for to 3.72 per cent and pro rata reduce EPC s opening rate base and denies the CCA s request, given that the Commission has previously approved EPC s debt issuance and rates in Decision D As noted earlier in this section, the CCA addressed the issue of debt issuance practices in Proceeding ATCO Gas and Pipelines Ltd. s capital tracker true-up application. In that decision, the Commission stated the following: 151. With respect to this issue, the Commission accepts ATCO Gas s explanation that a higher amount of borrowing does not result in a higher amount of interest expensed and passed on to customers. For rate making purposes, the volume of debt is based on the approved deemed, not, capital structure. The deemed capital structure determines the proportions of the mid-year rate base financed by equity and debt In the Commission s view, a general review of the utilities debt practices is better suited for examination in a GCOC proceeding The CCA also addressed the same issue of debt issuance practices in Proceeding ATCO Electric s capital tracker true-up application. In that decision, the Commission stated a higher amount of borrowing does not result in a higher amount of interest expense passed on to customers. This is because for rate making purposes the volume of debt is based on the approved deemed, not, capital structure. 71 The Commission also stated the following: 202. However, the Commission considers that ATCO Electric s risk profile, with the implications for the company s approved return on equity and equity thickness, as well as the ensuing matter of the related issue of whether ATCO Electric s issuances follow the approved deemed capital structure, to be outside the scope of a capital tracker proceeding. These matters belong in a GCOC proceeding. 72 [footnote removed] 68 Decision D01-, paragraph Decision D01-, paragraphs Decision D , paragraphs 151 and Decision D , paragraph Decision D , paragraph Decision D (December 4, 2017)

23 70. The Commission has reviewed the CCA s recommendations to revise EPC s embedded cost of debt for 2016 and 2017 to 3.44 per cent. The Commission has also reviewed the CCA s recommendation for EPC to use a deferral account to true up differences between and costs of debt should EPC not be able to prove how it will use its cash balance before the end of The Commission continues to hold the view that, for ratemaking purposes, the volume of debt is based on the approved deemed, not, capital structure. The Commission also maintains the view that the matter of general debt issuance practices is better suited for examination within a GCOC proceeding and, therefore, denies the CCA s requests for these reasons. 71. For the reasons discussed in Section 5 of this decision, EPC s 2016 embedded cost of debt of 3.93 per cent is approved for use in establishing EPC s revenue requirement. 72. The Commission has previously approved for EPC, a 0.25 per cent administrative fee, to be paid to the City, since the cost of debt provided by the ACFA is less than the cost that could be obtained elsewhere and has certain conditions with which ENMAX Corporation must comply. 73 Therefore, the Commission finds EPC s embedded cost of debt rate of 3.82 per cent for 2017 to be reasonable and approves it as filed. 6.3 No-cost capital 73. In accordance with Direction 18 of Decision , 74 EPC has included the mid-year balance of pre-collected hearing costs as its sole source of no-cost capital. 74. The following table provides EPC s no-cost capital for the test period, with comparative information provided for the years 2013-: Table 5. EPC transmission mid-year no cost capital 2014 compliance filing compliance filing ($ million) Opening balance 0 0 (0.4) 0 (0.6) (0.6) Provision (0.5) (0.5) (0.3) (0.3) (0.1) (0.1) Cost orders and assessments Closing balance (0.4) 0 (0.6) 0 (0.6) (0.6) Mid-year balance (0.2) 0 (0.5) 0 (0.6) (0.6) Source: Exhibit X0044, EPC-AUC-2017JAN27-002Attachment, schedules 25-9t and 29-1t. 75. The opening 2016 no cost capital balance of $0.6 million is composed of the outstanding hearing cost reserve anticipated to be settled by EPC in its deferral account proceeding. The 2016 and 2017 test year s consist of provisions for $0.1 million in each year, offset by cost order and assessment s, also in the amount of $0.1 million in each year. EPC has stated that it will apply to true up the differences between and amounts in a future application. 73 Decision , paragraph Decision , PDF page 207. Decision D (December 4, 2017) 15