Patrick Wruck Commission Secretary Commission.Secretary@bcuc.com bcuc.com Suite 410, 900 Howe Street Vancouver, BC Canada V6Z 2N3 P: 604.660.4700 TF: 1.800.663.1385 F: 604.660.1102 February 13, 2018 Sent via efile Ms. Diane Roy Vice President, Regulatory Affairs FortisBC Inc. 16705 Fraser Highway Surrey, BC V4N 0E8 electricity.regulatory.affairs@fortisbc.com Re: FortisBC Inc. Annual Review of 2018 Rates Project No. 1598920 Final Order with Reasons for Decision Dear Ms. Roy: Further to your August 10, 2017 filing of the above-noted application, please find enclosed British Columbia Utilities Commission Order G-38-18 with reasons for decision. Sincerely, Original signed by: Patrick Wruck Commission Secretary /ad Enclosure File 55610 Final Order with Reasons for Decision 1 of 1
Suite 410, 900 Howe Street Vancouver, BC Canada V6Z 2N3 bcuc.com P: 604.660.4700 TF: 1.800.663.1385 F: 604.660.1102 WHEREAS: ORDER NUMBER G-38-18 IN THE MATTER OF the Utilities Commission Act, RSBC 1996, Chapter 473 and FortisBC Inc. Annual Review for 2018 Rates BEFORE: B. A. Magnan, Panel Chair/Commissioner M. Kresivo, QC, Commissioner W. M. Everett, QC, Commissioner On February 13, 2018 ORDER A. On September 15, 2014, the British Columbia Utilities Commission (Commission) issued its Decision and Order G-139-14 approving a Multi-Year Performance-Based Ratemaking (PBR) Plan for FortisBC Inc. (FBC) for 2014 through 2019 (PBR Decision). In accordance with the PBR Decision, FBC is to conduct an annual review process to set rates for each year; B. By Order G-116-17 dated July 27, 2017, the Commission established a regulatory timetable for the annual review of FBC s 2018 rates; C. On August 10, 2017, FBC filed its Annual Review of 2018 Rates Application (Application) seeking approval of, among other things, permanent rates effective January 1, 2018, resulting in a general increase of 0.11 percent compared to 2017 rates, to be applied to all components of rates for all customer classes. The Application is made pursuant to sections 59 to 61 of the Utilities Commission Act (UCA); D. On October 3, 2017, FBC submitted an evidentiary update revising its Application to seek permanent rates effective January 1, 2018 resulting in a general increase of 0.17 percent compared to 2017 rates for all customer classes (Evidentiary Update); E. On November 10, 2017, FBC filed an application for approval to make its existing rates for all customer classes interim and refundable (with interest at the average prime rate of FBC s principal bank applied to any refundable amounts) effective January 1, 2018, pending the Commission decisions regarding the Application and the anticipated filing of FBC s 2018 Demand Side Management (DSM) Expenditure Schedule (2018 DSM Expenditure Application); File 55610 FBC 2018 Annual Rate Review Decision 1 of 3
Order G-38-18 F. On November 15, 2017, FBC filed its 2018 DSM Expenditure Application, pursuant to section 44.2 of the UCA; G. Pursuant to section 44.2(2) of the UCA, the Commission may not consent under section 61 of the UCA to an amendment to a schedule filed under section 61 to the extent that the amendment is for the purpose of, among other things, recovering expenditures on demand-side measures the public utility anticipates making during the period addressed by the schedule, unless the amendment is for the purpose of setting an interim rate; H. By Order G-172-17 dated November 30, 2017, the Commission approved FBC s application to set the existing rates for all customer classes as interim rates effective January 1, 2018; and I. The Commission has reviewed the evidence filed in the proceeding and makes the following orders. NOW THEREFORE pursuant to sections 44.2 and 59 to 61 of the Utilities Commission Act, for the reasons attached as Appendix A to this order, the Commission orders as follows: 1. FBC s current rates, which were approved as interim by Order G-172-17, will remain interim and refundable/recoverable, until the completion of the 2018 DSM Expenditure Application proceeding. 2. FBC is directed to file a compliance filing within 15 days of the issuance of the Commission Decision on the 2018 DSM Expenditure Application. The compliance filing must outline any adjustments to the 0.17 percent general rate increase, and the corresponding 2018 revenue requirements, including: the Castlegar Office Disposition deferral account, actual debt issuances, enacted corporate tax changes, approved BC Hydro rates effective April 1, 2018 and any changes resulting from the Commission decision in the 2018 DSM Expenditure Application. 2018 rates will become permanent following the approval of the compliance filing. 3. The following non-rate base deferral accounts and corresponding financing charges as described in the Application are approved as filed: Multi-Year DSM Expenditure Schedule, financed at FBC's weighted average cost of capital (WACD); Community Solar Pilot Project application, financed at FBC's short term interest (STI) rate; Tariff Applications, to be financed at the Company's STI rate; 2020 Revenue Requirements application, financed at FBC's WACD; and 2018 Joint Use Pole Audit, financed at FBC's WACD. 4. Z-factor treatment for the 2018 incremental operating and maintenance (O&M) and capital expenses related to the mandatory reliability standards (MRS) Assessment Reports No. 8 and No. 10 is approved. 5. FBC is approved to include the forecast 2018 MRS audit costs of $0.350 million in O&M outside of the formula O&M. 6. FBC s proposal to remove the 2017 capital expenditures in excess of the cumulative dead band from the earnings sharing calculation and add it to the FBC s opening 2018 plant additions balance is approved. 7. FBC is directed to provide additional reporting on capital expenditures in its annual review of 2019 rates filing, in accordance with the reasons for decision attached as Appendix A to this order. 8. FBC is directed to submit an updated system loss study in its application for rates effective January 1, 2020 following the end of the current PBR term. 9. FBC is directed to submit a table with the prior year forecast versus actual normalized after-savings residential use per customer for the most recent three years in its annual review of 2019 rates filing. File 55610 FBC 2018 Annual Rate Review Decision 2 of 3
Order G-38-18 10. FBC is directed to provide a table with the prior year forecast versus actual after-savings winter peaks for the most recent three years in the next annual review filing. 11. FBC is directed to comply with all other determinations made in the reasons for decision attached as Appendix A to this order. DATED at the City of Vancouver, in the Province of British Columbia, this 13 th day of February 2018. BY ORDER Original signed by: B. A. Magnan Commissioner Attachment File 55610 FBC 2018 Annual Rate Review Decision 3 of 3
FortisBC Inc. Annual Review for 2018 Rates Reasons for Decision February 13, 2018 Before: B. A. Magnan, Panel Chair/Commissioner M. Kresivo, QC, Commissioner W. M. Everett, QC, Commissioner 1 of 21
Table of Contents Page no. 1.0 Introduction...3 1.1 Background...3 1.2 Approvals sought...4 1.3 Application review process...4 1.4 Interim rate approval...4 2.0 Determinations on approvals sought...5 2.1 Rate change...5 2.2 Non-Rate Base Deferral Accounts...6 2.3 Mandatory Reliability Standards...6 2.3.1 Z-factor treatment for the 2018 incremental operating and maintenance and capital expenses related to Mandatory Reliability Standards assessment reports...6 2.3.1 2018 Mandatory Reliability Standards audit costs...9 3.0 Issues arising...9 3.1 Capital spending in excess of the dead band...9 3.2 Operational integration... 15 3.3 Load forecast methodology... 15 3.3.1 System loss methodology... 16 3.3.2 Residential Use Per Customer... 17 3.3.3 After savings winter peak... 18 3.4 Service Quality Indicators... 19 3.5 Performance-based ratemaking evaluation... 20 File 55610 FBC 2018 Annual Rate Review Decision 2 of 21
1.0 Introduction 1.1 Background By Order G-139-14 dated September 15, 2014 and the accompanying decision (PBR Decision), the British Columbia Utilities Commission (Commission, BCUC) approved a Performance-Based Ratemaking (PBR) Plan for FortisBC Inc. (FBC) covering a six-year period commencing in 2014. The primary purpose of the PBR Plan is to create an incentive for FBC to adopt a productivity focus and seek out sustainable operating and capital savings while maintaining service quality levels as measured by Service Quality Indicators (SQIs). The PBR Plan provides for an equal sharing of any PBR-related savings between the customer and FBC. A key element of the PBR Plan is the provision for an annual review. As part of the FBC Application for Approval of a Multi-Year PBR Plan for 2014 through 2018 Decision (PBR Decision), the Commission set out the following items to be addressed at each annual review: a. Evaluation of the operation of the PBR Plan in the past year(s) and identification by any party of any deficiencies/concerns with the operation of the PBR Plan that have become apparent. b. Review of the current year s projections and the upcoming year s forecast. c. Identification of any efficiency initiatives that FBC has undertaken, or intends to undertake, that require a payback period extending beyond the PBR Plan period and make recommendations to the Commission with respect to the treatment of such initiatives. d. Review of any exogenous events that FBC or stakeholders have identified that should be put forward to the Commission for decision as to their exclusion from the PBR Plan. e. Review of FBC s performance with respect to SQIs. Bring forward recommendations to the Commission where there has been a sustained serious degradation of service. f. Assess and make recommendations with respect to any SQIs that should be reviewed in future annual reviews. g. Assess and make recommendations to the Commission on the scope for future annual reviews. 1 On August 10, 2017, FBC filed its Annual Review for 2018 Rates Application (Application). In the Application, FBC forecast a 0.11 percent rate increase for 2018. With regard to savings achieved under the PBR Plan, FBC projects its 2017 operating and maintenance (O&M) expenditures will be $1.2 million lower than the PBR formula amount. 2 However, FBC forecasts its capital expenditures will be above the capital formula amount, which is discussed further in section 3.1 of this decision. Overall, FBC projects that $0.831 million of earnings sharing savings will be distributed to customers in 2018. 3 Subsequent to the filing of the Application, FBC filed an evidentiary update on October 3, 2017 (Evidentiary Update). FBC describes two items which result in changes to the forecast 2018 rates, including updates to certain deferral account balances and amortization expense. As a result of the changes identified in the Evidentiary Update, FBC has revised its 2018 forecast revenue deficiency from $0.4 million to $0.619 million, 1 FortisBC Inc. (FBC) Application for Approval of a Multi-Year PBR Plan for 2014 through 2018, dated September 15, 2014 (PBR Decision), pp. 179 180. 2 Exhibit B-2, p. 4. 3 Exhibit B-2, p. 1. File 55610 FBC 2018 Annual Rate Review Decision 3 of 21
which equates to a revised rate increase of 0.17 percent from 0.11 percent to be applied to all components of rates for all customer classes. 4 1.2 Approvals sought FBC seeks the following approvals pursuant to sections 59 to 61 of the Utilities Commission Act (UCA): 1. Permanent rates for all customers effective January 1, 2018, resulting in a general rate increase of 0.17 percent compared to 2017 rates (subject to adjustment for updates and the results of the FBC 2018 Demand-Side Management [DSM] Expenditure Schedule [2018 DSM Expenditure Application]), to be applied to all components of rates for all customer classes. 2. The creation of five non-rate base deferral accounts, as described in Section 12.4.1 of the Application: a. Multi-Year DSM Expenditure Schedule, to be financed at the Company s weighted average cost of debt (WACD); b. Community Solar Pilot Project application, to be financed at the Company s short term interest (STI) rate; c. Tariff Applications, to be financed at the Company s STI rate; d. 2020 Revenue Requirements application, to be financed at the Company s WACD; and e. 2018 Joint Use Pole Audit, to be financed at the Company s WACD. 3. Z-factor treatment for the 2018 incremental O&M and capital expenditures related to the Mandatory Reliability Standards (MRS) Assessment Reports No. 8 and No. 10, as described in Section 12.2 of the Application. 1.3 Application review process By Order G-116-17 dated July 19, 2017, the Commission established a regulatory timetable for the review of the Application, including one round of information requests (IRs), a workshop open to all participants and written argument. The following registered as interveners and participated in the proceeding: Commercial Energy Consumers Association of British Columbia (CEC); BC Sustainable Energy Association and Sierra Club BC (BCSEA); Movement of United Professionals (MoveUP); British Columbia Municipal Electrical Utilities (BCMEU); Irrigation Ratepayers Group (ICG); British Columbia Old Age Pensioners Organization, Disability Alliance BC, Council of Senior Citizens Organizations of BC, and the Tenant Resource and Advisory Centre (BCOAPO); and Industrial Customers Group (ICG). 1.4 Interim rate approval On November 10, 2017, FBC filed an application for approval to make its existing rates for all customer classes interim and refundable (with interest at the average prime rate of FBC s principal bank applied to any 4 Exhibit B-2-1, pp. 1 2. File 55610 FBC 2018 Annual Rate Review Decision 4 of 21
refundable amounts) effective January 1, 2018 (Interim Rate Application), pending the Commission decisions regarding the Application and the then anticipated filing of FBC s 2018 DSM Expenditure Application. On November 15, 2017, FBC filed its 2018 DSM Expenditure Application. Pursuant to section 44.2(2) of the UCA, the Commission may not consent under section 61 of the UCA to an amendment to a schedule filed under section 61 to the extent that the amendment is for the purpose of, among other things, recovering expenditures on demand-side measures the public utility anticipates making during the period addressed by the schedule, unless the amendment is for the purpose of setting an interim rate. By Order G-172-17 dated November 30, 2017, the Commission approved FBC s application to set the existing rates for all customer classes as interim effective January 1, 2018. 2.0 Determinations on approvals sought 2.1 Rate change No issues were raised with respect to FBC s request for approval of a general rate increase of 0.17 percent and none of the interveners opposed the Commission s approval of this request in their final arguments. However, as noted above, pursuant to section 44.2(2) of the UCA, the Commission may not consent under section 61 of the UCA to an amendment to a schedule filed under section 61 to the extent that the amendment is for the purpose of, among other things, recovering expenditures on demand-side measures the public utility anticipates making during the period addressed by the schedule, unless the amendment is for the purpose of setting an interim rate. Accordingly, FBC s current rates, which were approved as interim by Order G-172-17, will remain interim and refundable/recoverable, until the completion of the 2018 DSM Expenditure Application proceeding. By directive 2 of Order G-172-17 the Commission directed FBC to refund/recover the difference between the interim and permanent rates, as determined by the Commission following the final determination of this Application and FBC s 2018 DSM Expenditure Application, with interest calculated on any refundable amounts at the average prime rate of FBC s principle bank for its most recent year. In its Reply Argument, FBC submits that [a]fter the completion of the 2018 DSM Application proceeding, FBC would be able to incorporate into its compliance filing for final 2018 rates the updates referred to in the workshop, such as corporate tax changes, and the results of any BC Hydro rate freeze. 5 The other items referred to in the workshop are the Castlegar Office Disposition deferral account approved by Order G-153-17 and the long-term debt forecast for an actual issuance taking place. Panel determination The Panel has reviewed the evidence and finds the requested rate increase to be reasonable. FBC is directed to file a compliance filing within 15 days of the issuance of the Commission Decision on the 2018 DSM Expenditure Application. The compliance filing must outline any adjustments to the 0.17 percent general rate increase, and the corresponding 2018 revenue requirements, including: the Castlegar Office Disposition deferral account, actual debt issuances, enacted corporate tax changes, approved BC Hydro rates effective April 1, 2018 and any changes resulting from the Commission decision in the 2018 DSM Expenditure Application. 2018 rates will become permanent following approval of the compliance filing. 5 FBC Reply Argument, p. 1. File 55610 FBC 2018 Annual Rate Review Decision 5 of 21
2.2 Non-Rate Base Deferral Accounts No issues were raised by interveners with respect to FBC s request for approval to create five non-rate base deferral accounts. Four of the five new deferral accounts relate to costs for current and future regulatory proceedings and the Panel notes that the request for approval of these deferral accounts is consistent with FBC s previous treatment of regulatory proceeding costs during the PBR term. The request for approval of the other deferral account, the 2018 Joint Use Pole Audit, is consistent with the treatment of the 2013 Joint Use Pole Audit costs. Panel determination The Panel has reviewed the evidence and finds the request to be reasonable. Accordingly, the following nonrate base deferral accounts and corresponding financing charges are approved as filed: 1. Multi-Year DSM Expenditure Schedule, financed at FBC s WACD; 2. Community Solar Pilot Project application, financed at FBC s STI rate; 3. Tariff Applications, to be financed at the Company s STI rate; 4. 2020 Revenue Requirements application, financed at FBC s WACD; and 5. 2018 Joint Use Pole Audit, financed at FBC s WACD. 2.3 Mandatory Reliability Standards 2.3.1 Z-factor treatment for the 2018 incremental operating and maintenance and capital expenses related to Mandatory Reliability Standards assessment reports FBC applies for approval of Z-factor treatment for its 2018 incremental O&M and capital expenditures related to the MRS Assessment Reports No. 8 and No. 10 FBC forecasts incremental costs as follows: Table 1: FBC s Forecast Incremental Costs 6 AR 8 AR 10 Total O&M $0.540 million $0.180 million $0.720 million Capital $0.050 million $0 million $0.050 million Total $0.590 million $0.180 million $0.770 million FBC submits that these costs continue to exceed the Commission-defined materiality threshold of $0.301 million and satisfy the other Z-factor criteria on the same basis as accepted by the Commission in Order G-202-15 and G-8-17. 7 With respect to the O&M costs related to AR 10, FBC clarifies that these costs relate to 2018 only and that it has identified high level estimates of approximately $3.3 million of one-time and approximately $2.8 million of 6 Exhibit B-2, pp. 49, 56. 7 Exhibit B-2, p. 108. File 55610 FBC 2018 Annual Rate Review Decision 6 of 21
ongoing costs which were included in the BC Hydro Assessment Report No. 10 that was submitted to the Commission on May 1, 2017. 8 Variances between the forecast and actual incremental MRS expenses will be captured in the Flow-through deferral account. In the 2014 PBR Decision, the Commission established the following criteria for evaluating whether the impact of an event qualifies for Z-factor treatment: a) The costs/savings must be attributable entirely to events outside the control of a prudently operated utility; b) The costs/savings must be directly related to the exogenous event and clearly outside the base upon which the rates were originally derived; c) The impact of the event was unforeseen; d) The costs must be prudently incurred; and e) The costs/savings related to each exogenous event must exceed the Commission defined materiality threshold. The materiality threshold for FBC is established at $0.301 million as approved by Commission Order G-184-14. Position of the parties BCOAPO submits that FBC has failed to provide sufficient evidentiary support to justify that its forecast expenditures, in relation to AR 10, meet the Commission s $0.301 million threshold to qualify for Z-factor treatment. In particular, BCOAPO does not support the proposed Z-Factor treatment of AR 10 because FBC was not able to provide an O&M/capital breakdown of the anticipated $3.3 million in future expenditures on AR 10 or a description of when exactly the costs will be incurred between now and when AR 10 must be implemented in 2020. 9 CEC also addresses the AR 10 O&M costs in relation to the materiality threshold. CEC supports approval of Z- factor treatment of the costs but recommends a proviso that the costs for the AR 10 event are demonstrated to exceed the materiality threshold prior to the end of the PBR period, namely; that the costs for 2018 and 2019 for AR 10 exceed $0.301 million. In the event the costs do not exceed the materiality threshold by the end of the PBR, CEC submits that a true up be undertaken at the end of the PBR to include the costs in the formula. 10 All other interveners either support approval for Z-factor treatment for the 2018 Incremental O&M and capital expenses related to AR 8 and O&M expenses related to AR 10 or provide no comment. FBC disagrees with BCOAPO s position that it failed to provide sufficient evidence that the estimated costs in respect of AR 10 meet the materiality threshold for Z-factor treatment and states that BCOAPO has failed to provide a valid reason for the Z-factor treatment not being approved. FBC points to its response to BCUC IR 1.24.2 in which it provided evidence that it will be assessing and determining the strategy and detailed scope required to comply with the revised AR 10 standards in 2018. 11 8 Exhibit B-3, BCUC IR 24.2. 9 BCOAPO Final Argument, p. 15. 10 CEC Final Argument, p. 24. 11 FBC Reply Argument, pp. 7 8. File 55610 FBC 2018 Annual Rate Review Decision 7 of 21
FBC submits that BCOAPO s argument regarding FBC not providing an O&M and capital breakdown of the $3.3 million or the timing as to exactly when those expenses would be incurred between now and 2020 when AR 10 must be implemented, is not a valid reason for not approving the Z-factor treatment. In particular, FBC submits that in the Application, it only provided a preliminary forecast ($0.180 million) for O&M costs for 2018 in respect of the AR 10 and that it is in the process of creating detailed scope and costs estimates for becoming compliant. A high-level estimate of the costs is approximately $3.3 million of one-time and $2.8 million of ongoing costs. Further, FBC will be addressing expenses for 2019 and future expenses in its future filings with the Commission. 12 In response to CEC, FBC submits approving the Z-factor treatment for AR 10 with the proviso that the costs for the AR 10 event are demonstrated to meet the materiality threshold prior to the end of the PBR period, is not necessary given that FBC is required to implement AR10 and its estimated costs will significantly exceed the $0.301 million threshold. 13 Panel determination The Panel approves Z-factor treatment for the 2018 incremental O&M and capital expenses related to the MRS Assessment Reports No. 8 and No. 10. The Panel considers that the forecast incremental costs in relation to AR 8 and AR 10 are triggered by an external regulatory body and FBC is legally obligated to comply with the reliability standards. Further, the Panel agrees with FBC that the incremental costs for AR 8 and AR 10 are entirely attributed to complying with the MRS program and could not have been foreseen at the time the 2013 base rate was set because the new MRS standards were either non-existent or under development that the time. The Panel has reviewed the 2018 forecast O&M and capital costs associated with AR 8 and AR 10 and accepts them as reasonable. The Panel also finds the forecast 2018 costs in respect of AR 8 exceed the materiality threshold for Z factor treatment. With respect as to whether the forecast costs for AR 10 meets the materiality threshold, the Panel notes that AR 10 was only approved in July of 2017 and FBC has only included in its Application an estimate of its forecast O&M costs of $0.180 million for 2018. This amount on its own does not meet the materiality threshold for Z- factor treatment. However, FBC s preliminary high-level estimate of costs to become and remain compliant in respect of AR 10 is approximately $3.3 million of one-time costs and approximately $2.8 million of on-going costs. What is relevant to the materiality threshold is that the estimated costs exceed the threshold and are due to unforeseen events outside the utility s control. The Panel finds there is sufficient evidence to establish that FBC s estimated expenses in relation to AR 10 significantly exceed the Commission s materiality threshold for Z- factor treatment. The Panel rejects CEC s recommended proviso that a true up of AR 10 costs take place in the event that FBC does not demonstrate that the cost for AR 10 exceed the materiality threshold by the end of the PBR period. Further, applicable variances between forecast and actual MRS costs are captured in FBC s Flow-through deferral account to be returned to, or recovered from ratepayers. 12 FBC Reply Argument, pp. 7 8. 13 FBC Reply Argument, pp. 8 9. File 55610 FBC 2018 Annual Rate Review Decision 8 of 21
2.3.1 2018 Mandatory Reliability Standards audit costs Every three years, FBC is subject to an MRS audit which is performed by the administrator of the BC MRS Program, Western Electricity Coordinating Council (WECC). The next triennial MRS audit is scheduled to occur in 2018. FBC estimates the costs related to the 2018 compliance audit to be $0.350 million and includes these costs in O&M outside of the formula. In its response to BCUC IR 20.2, FBC states that the actual 2015 MRS audit costs were $0.375 million. In its Final Argument, ICG submits that FBC justifies its approach to include the forecast MRS compliance audit costs outside the formula O&M because the audit is required every three years. ICG states that [f]or the purposes of this Application, ICG does not object to this approach, but at the same time recommends that the Commission not accept FBC s justification for this approach. Many O&M costs are not annual costs, and yet a base level of O&M costs can be established that includes O&M costs that are not annual costs. 14 In its Reply Argument, FBC states that ICG has misstated its reasons for the proposed approach and states that it seeks to include the 2018 MRS audit costs in O&M outside of the formula pursuant to the Commission s determination on page 238 of the PBR Decision, which states: As the MRS audit is a non-recurring expenditure, it therefore should not be included in FBC s Base O&M. 15 Panel determination The Panel determines that it is appropriate to include the forecast 2018 MRS audit costs of $0.350 million in O&M outside of the formula O&M. The Panel is in agreement with FBC that it is appropriate to include the forecast 2018 MRS Audit costs in O&M outside of the formula, as the Commission determined in the original PBR decision that these specific costs should be excluded from base O&M because they are a non-recurring expenditure. In addition the Panel notes that these costs are consistent with the actual 2015 MRS Audit costs and considers the 2018 forecast to be reasonable. 3.0 Issues arising In reviewing the FBC Application, the Evidentiary Update and further evidence provided in response to IRs from both the Commission and interveners, several issues arose that require Panel discussion and determinations. These issues are addressed in the subsections below. 3.1 Capital spending in excess of the dead band Background In the PBR Decision, the Commission approved a one-year 10 percent dead band and a two-year 15 percent cumulative dead band for FBC s formula-driven capital spending. 16 Further, in Order G-120-15 the Commission directed FBC to make recommendations as to any adjustments to base capital (re-basing) for Commission approval should the prescribed dead band for annual and two-year cumulative capital expenditures be exceeded. 17 14 ICG Final Argument, p. 2. 15 FBC Reply Argument, p. 9; FBC PBR Decision, p. 238. 16 FBC PBR Decision, p. 175. 17 FortisBC Energy Inc. (FEI) and FBC Multi-Year PBR Plans for 2014 through 2019 Approved by Decisions and Orders G-138-14 and G-139-14 Capital Exclusion Criteria under PBR Compliance Filing, Final Order G-120-15 with Reasons for Decision. File 55610 FBC 2018 Annual Rate Review Decision 9 of 21
In Table 1-2 on page 7 of the Application, FBC compares actual vs. formula capital expenditures from 2014 to 2017 as follows: Table 2: Capital Expenditures 2014 to 2017 ($ millions) 18 As demonstrated in the above table, 2017 is the first year during the current PBR term in which forecast capital expenditures are outside of both the prescribed one-year and two-year cumulative capital dead bands of 10 percent and 15 percent, respectively. The forecast 2017 capital expenditures are $15.306 million or 32.71 percent greater than formula capital. The cumulative 2014 2017 capital expenditures are $21.149 million or 11.22 percent greater than formula capital. FBC considers the 2017 capital formula variance to be significant in the context of the PBR Plan because the variance is materially over the dead band. 19 In its response to BCUC IR 10.1, FBC attributes the $15.306 million 2017 forecast capital expenditures in excess of the formula capital to the following expenditure categories and projects and the corresponding cost estimates: Table 3: 2017 Capital Expenditures in Excess of Formula Capital 20 2017 Capital Costs $ (millions) Growth factor reduction for net capital additions $0.2 X-factor increase by 0.53 percent $0.3 System improvements to accommodate customer growth $1.3 Forced relocation of Highway 97 infrastructure $0.6 Customer-driven modifications to RG Anderson Terminal $3.6 Capital work that was reprioritized to 2017 and further described in response to CEC IR 1.8.1 Cost pressure resulting from improved understanding of project scope requirements $5.3 $1.9 18 Exhibit B-2, p. 7, Table 1-2. 19 Exhibit B-3, BCUC IR 12.3. 20 Exhibit B-3, BCUC IR 10.1. File 55610 FBC 2018 Annual Rate Review Decision 10 of 21
FBC submits that the remaining $2.1 million can be explained by the unfavourable US currency exchange rate and other miscellaneous factors. 21 With respect to the $5.3 million in capital work that was reprioritized to 2017, FBC explains in its response to CEC IR 1.8.1 that the majority of the projects reprioritized from previous years were deferred due to capital cost pressures. 22 With respect to its capital spending during the PBR term, FBC states that it: has been successful in mitigating some of the cost pressures through efficiencies and work prioritization. However, the cost pressures have exceeded the Company s ability to re-prioritize further work within the formula capital spending envelope without incurring more risk to the system. As well, previous work that was delayed is now considered essential or mandatory work and cannot be deferred further. To mitigate this risk exposure, FBC has increased its planned sustainment activities in 2017. 23 FBC expects that capital spending in excess of the dead band will be a continuing trend 24 for the remainder of the PBR term and estimates $57 million in capital expenditures for 2018 as compared to $47.4 million in forecast formula capital and approximately $59.5 million in capital expenditures for 2019 as compared to $49.1 million in forecast formula capital expenditures. 25 FBC expects that the following cost pressures experienced in 2017 will continue beyond 2017: System improvements to accommodate customer growth; Customer-driven modifications at RG Anderson Terminal; Increased cost due to unfavourable exchange rates; and Re-prioritized work. 26 FBC also predicts the following new cost pressures will contribute to capital expenditures exceeding the formula during the remainder of the PBR: New projects in generation to address compliance with new WorkSafeBC legislation; Unanticipated transmission projects to address safety and reliability issues; and Additional substation projects to address end-of-life equipment replacements. 27 Regulatory history of the capital dead band FBC provides a summary of the regulatory history regarding the capital dead band in its Application, including excerpts from evidence in the FBC 2014-2018 PBR proceeding, the PBR Decision and the decision accompanying Order G-120-15 regarding the capital exclusion criteria under the PBR. 28 Directive 4 of Order G-120-15 reads: Should the dead-band for annual capital expenditures approved in the PBR Plans be exceeded FBC or FEI are directed to include in its next Annual Review filing, recommendations as to any adjustment to base capital (re-basing) for Commission approval. 21 Exhibit B-3, BCUC IR 10.1. 22 Exhibit B-7, CEC IR 1.8.1. 23 Exhibit B-2, p. 8. 24 Exhibit B-3, BCUC IR 12.7. 25 ibid., BCUC IR 12.4. 26 ibid., BCUC IR 10.1.2. 27 ibid., BCUC IR 12.4. 28 Exhibit B-2, pp. 9 12. File 55610 FBC 2018 Annual Rate Review Decision 11 of 21
FBC also quotes from Order G-182-16 regarding the FEI Annual Review for 2017 Rates, where the Commission addressed FEI 2016 capital expenditures in excess of the prescribed dead band, as follows: The Panel approves FEI s proposal to remove the amount of formula capital which has exceeded the cumulative dead band from the earnings sharing calculation, and to add the amount of capital in excess of the dead band to FEI s opening 2017 plant additions balance. 29 FBC notes that in Order G-182-16 the Commission found that it was not considered necessary to undertake a re-basing hearing regarding the approved formula capital spending envelope. 30 Treatment of capital expenditures in excess of the dead band FBC proposes to add $11.268 million to its opening plant in service for 2018 so that the two-year cumulative capital variance is within the two-year dead band of 15 percent. FBC also reduced the cumulative capital expenditures utilized in the earning sharing mechanism by the same amount ($11.268 million), such that the earnings sharing with customers is increased and there is no earnings sharing on the amount by which FBC exceeded the dead band. 31 In support of its proposed treatment as compared to re-basing the capital formula, FBC states that: FBC is not recommending an increase to the annual capital formula amount for the remaining years of the PBR term. FBC does not believe that a lengthy process to review which capital items should be added into the capital formula is an efficient solution to the ongoing capital issues. By not adjusting the capital formula amount, the incentive properties of the PBR Plan remain intact and will remain consistent throughout the remainder of the PBR term. While FBC expects to continue to experience capital cost pressures, the dead band mechanism remains a reasonable way to deal with capital cost pressures by ensuring no sharing of negative earnings impacts with customers for capital expenditures in excess of 10 percent of the formula amount or 15 percent over two years. 32 In the Annual Review Workshop, FBC indicated it would propose a new capital base and a revised capital formula, or alternative approach to the treatment of capital, in the next PBR Plan allowing for a fulsome review of the formula in the context of all the other components. 33 Positions of the parties None of the interveners in the proceeding opposed FBC s treatment of the capital expenditures in excess of the dead band, which is to add $11.268 million to its opening plant in service for 2018. CEC and BCSEA 34 provided support for this treatment, while CEC and ICG 35 support FBC s recommendation that it would not be appropriate to adjust the capital expenditure formula for the rest of the PBR period. However, several interveners raised issues with FBC capital expenditures and the formulaic approach to capital under the current PBR. 29 FEI Annual Review for 2017 Rates Application Final Order G-182-16 with Reasons for Decision, dated December 7, 2016 (FEI Annual Review for 2017 Rates Decision), p. 16. 30 Exhibit B-2, p. 12. 31 Exhibit B-2, p. 13. 32 Exhibit B-1-2, p. 12. 33 Exhibit B-14, p. 14. 34 BCSEA Final Argument, p. 5; CEC Final Argument, p. 19. 35 CEC Final Argument, p. 19; ICG Final Argument, p. 2. File 55610 FBC 2018 Annual Rate Review Decision 12 of 21
CEC expresses the concern that FBC could be deferring several projects to the detriment of rate payers and notes that deferring capital projects also defers the benefits and can result in increasing costs as pressures increase to undertake the projects. CEC also argues that capital planning is not readily established under a formulaic approach as has been undertaken in this PBR. 36 ICG s concern is that the capital expenditures in excess of the formula are not in the long-term interests of customers and submits that a review of FBC s capital planning program is warranted. ICG requests that FBC provide a capital planning program report with the annual review of 2019 rates application. 37 MoveUp s concern is that the PBR capital formula imposes shorter-term considerations and a current-year horizon on some decisions. 38 BCMEU agrees with FBC that the existing capital formula is not working as intended and will need an overhaul in the event that PBR is chosen as the preferred approach to regulation of FBC at the end of the present PBR period. 39 FBC responds to ICG s concern regarding capital planning by referencing the evidence FBC presented during the proceeding on how it is prioritizing its capital program and the reasons why it has been unable to stay within the formula. 40 With respect to the capital savings achieved under the PBR, FBC states that the PBR has provided the benefit of a longer test period with more certainty and flexibility for FBC s capital planning. 41 FBC also addresses the concern raised regarding deferring capital and states the movement of capital projects among years is a normal part of managing the capital program and the prudent deferral of some projects outside the PBR term should not be a subject of concern. 42 Panel determination In the PBR Decision, the Panel approved a one-year 10 percent dead band and a two-year 15 percent cumulative dead band for FBC s formula-driven capital spending. With respect to capital expenditures in excess of these dead bands, directive 4 of Order G-120-15 reads: Should the dead-band for annual capital expenditures approved in the PBR Plans be exceeded FBC or FEI are directed to include in its next Annual Review filing, recommendations as to any adjustment to base capital (re-basing) for Commission approval. 43 In the current proceeding, FBC has not recommended any adjustment to base capital and instead proposes to remove the capital expenditures in excess of the cumulative dead band from the earnings sharing calculation and add it to the FBC s opening 2018 plant additions balance. 36 CEC Final Argument, p. 9. 37 ICG Final Argument, p. 2. 38 MoveUp Final Argument, p. 4. 39 BCMEU Final Argument, p. 2. 40 FBC Reply Argument, pp. 9 10. 41 ibid., p. 19. 42 ibid., p. 22. 43 FortisBC Energy Inc. (FEI) and FBC Multi-Year PBR Plans for 2014 through 2019 Approved by Decisions and Orders G-138-14 and G-139-14 Capital Exclusion Criteria under PBR Compliance Filing, Final Order G-120-15 with Reasons for Decision. File 55610 FBC 2018 Annual Rate Review Decision 13 of 21
2017 is the first year during the current PBR term that FBC capital expenditures have exceeded the prescribed one-year and two-year cumulative capital dead bands of 10 percent and 15 percent, respectively. However, FBC advises that it will continue to experience cost pressures for the remainder of the PBR term and capital expenditures in excess of the dead band will be a continuing trend. 44 In light of this expected continuing trend of capital expenditures in excess of the dead band, the Panel notes that adjustments to base capital (i.e. re-basing) could bring the actual capital spending into better alignment with FBC s formula capital expenditures. However, it is the Panel s view that initiating a process to determine any adjustments to base capital is not an efficient solution to the capital expenditures in excess of the dead band given the short time remaining in the current PBR term. The current PBR term is 2014 2019 and the Panel acknowledges that any adjustments to base capital may not be determined until the final year of the PBR or later. Therefore, the Panel does not consider it appropriate to undertake a re-basing process during the current PBR term. For these reasons, the Panel approves FBC s proposal to remove the capital expenditures in excess of the cumulative dead band from the earnings sharing calculation and add it to the FBC s opening 2018 plant additions balance. The Panel is concerned that the capital spending in excess of the dead band is expected to be an ongoing issue for the remainder of the PBR term. As a result, and with consideration to the concerns expressed by the interveners in this proceeding regarding capital, the Panel considers that additional capital reporting is required in the next annual review application. FBC is directed to provide the following information related to capital in its annual review of 2019 rates application: 1. A breakdown and explanation for both the annual variances (2014 2018) and cumulative variances between forecast/actual and formula capital which quantifies the variances attributable to the following factors: System improvements to accommodate customer growth; Customer driven modifications at RG Anderson Terminal; Increased costs due to unfavourable exchange rate; A list of work prioritized from previous years by project, including the capital cost and the previously scheduled dates and classifications (i.e. mandatory, essential or flexible); New projects in generation to address compliance with new WorkSafeBC legislation; Unanticipated transmission projects to address safety and reliability issues; Additional substation projects to address end-of-life equipment replacements; and Any other significant factors or miscellaneous items. 2. A description of how FBC is prioritizing its capital expenditures during the remainder of the PBR term, with reference to the prioritization ascribed to its existing ongoing projects as well as any new projects to be undertaken during the PBR term. 3. A list of projects that were originally planned to be completed during the PBR term that are now expected to be delayed until after the PBR term, including a description of the project, reason for the delay, the estimated capital cost, classification and the year for which it was originally planned. 44 Exhibit B-3, BCUC IR 12.7. File 55610 FBC 2018 Annual Rate Review Decision 14 of 21
3.2 Operational integration MoveUp raises concerns in its Final Argument with respect to the integration of FEI and FBC at the operational level, particularly in the area of customer service. MoveUp states that for regulatory purposes, one of the most significant issues is the avoidance of cross-subsidy in the coordinated delivery of customer service. 45 MoveUp raises specific concerns with the SAP Integration initiative, outlined in the Application, as follows: that the SAP integration project is being executed in a manner that undermines the availability of reliable data to ascertain the degree of potential cross subsidy with greater rigour and precision than the time-sheet-based formula being employed now. In the event that it appears the $100,000 threshold established by the Commission is approached or surpassed, the manner in which SAP integration is being implemented, including the single sign-on module that FortisBC has opted to incorporate will make it far more difficult for the Commission to exercise the appropriate level of oversight and provide adequate assurance that there is no inappropriate cross subsidy occurring. 46 FBC argues that MoveUP s position is incorrect, appearing to be based more on its opposition to shared services than an assessment of the evidence, and reflects mistaken assumptions about the nature and consequences of the SAP Integration. 47 FBC also submits that the SAP Integration will not impair the availability of reliable data to track costs. 48 Further, FBC points to several Commission decisions where similar concerns raised by MoveUp were dismissed by the Commission. 49 Panel discussion The issue of cross subsidization between FBC and FEI has been raised in other proceedings and addressed in previous decisions for both FEI and FBC. No additional evidence has been presented in this proceeding that would provide further clarification on the issue of cross-subsidization. Therefore, this Panel continues to support the commentary in previous Commission decisions that support the arguments put forward by FBC concerning this matter. 3.3 Load forecast methodology FBC s gross system load is a combination of residential, commercial, wholesale, industrial, street lighting, irrigation loads and system losses. The forecast of gross system load includes the impacts of forecast energy savings, which include DSM savings, and the impacts of the Residential Conservation Rate, the Customer Information Portal, the Advanced Metering Infrastructure (AMI) program and future rate changes. FBC states that its load forecast methods are consistent with those used in prior years and accepted by the Load Forecast Technical Committee in 2011. 50 FBC forecasts 2018 normalized gross load to be approximately 3,485 GWh which is a 74 GWh decrease compared to the 2017 approved gross load. FBC states that the decrease is due to decreased loads in the 45 MoveUp Final Argument, p. 6. 46 MoveUp Final Argument, p. 6. 47 FEI Reply Argument, p 12. 48 FBC Reply Argument, p. 14. 49 FBC Reply Argument, pp. 12 13; FEI Annual Review for 2017 Rates Decision, p.25 ; FBC Annual Review for 2017 Rates Final Order G-8-17 with Reasons for Decision, dated January 20, 2017, p. 29; FEI All-Inclusive Code of Conduct /Transfer Pricing Policy Application, Final Order G-25-17 with Reasons, dated March 1, 2017, p. 24. 50 Exhibit B-2, p. 21. File 55610 FBC 2018 Annual Rate Review Decision 15 of 21
residential and industrial classes, partially offset by increased commercial loads. Based on the 2017 rates, FBC forecasts 2018 revenue of $356.34 million. 51 A number of interveners raise issues with respect to FBC s load forecast methodology and make recommendations that the Commission direct FBC to provide specific compliance filings as a result. Several of these issues are discussed below. The Panel notes that no interveners raised issues necessitating a revised 2018 load forecast. 3.3.1 System loss methodology FBC states that system losses are comprised of: losses in the transmission and distribution system; company use; losses due to wheeling through the BC Hydro system; and unaccounted for energy (meter inaccuracies and theft). 52 FBC has assumed a loss rate of 8 percent of gross load before AMI impact, which is consistent with past practice. The loss rate is based on a loss study that was conducted in 2012 and FBC submits that this is still in line with the loss rate that FBC is seeing on an annual basis (averaging 7.88 percent over the previous three years, after DSM and AMI impacts). 53 FBC presents the system losses before and after AMI from 2013 to 2019 in the Table below on page 32 of its Application, which shows that in 2017, the difference between system losses of 7.95% of gross load and 7.84% of gross load is 3.9 GWh. Table 4: System Losses Before and After AMI, 2013 2019 54 51 Exhibit B-2, p. 21. 52 Exhibit B-2, p. 30. 53 Exhibit B-2, p. 30. 54 Exhibit B-2, p.32. File 55610 FBC 2018 Annual Rate Review Decision 16 of 21
Position of the parties In its Final Argument, ICG submits the Commission should no longer be willing to accept FBC s system loss forecast methodology and requests that the Commission direct FBC to review its system loss methodology and submit a new loss study in the next annual review proceeding, with a fulsome analysis of the division of transmission system versus distribution system losses. 55 ICG further submits that FBC s system loss forecast methodology appeared to be a simple comparison of gross billing against purchases and generation, and contained several errors. ICG argues that the loss factor is material because it has a large impact on customers that take service under Rate Schedule 109. 56 In response, FBC submits that it is already analysing the AMI loss rate in order to update its loss projections and the project will be complete in 2018 or 2019. Further, FBC submits that the existing loss projections are accurate and variances will be trued up through the Flow-through deferral account. 57 Panel determination The Panel is satisfied with FBC s system loss forecast methodology and declines ICG s recommendation to direct FBC to submit a new loss study in the next annual review proceeding in 2019. FBC states that it is currently examining the AMI loss rate in order to update its loss projections. The Panel sees value in FBC updating its loss projections before the end of the PBR term so that any changes can be incorporated into rates effective January 1, 2020. Accordingly, FBC is directed to file its updated system loss study in its application for rates effective January 1, 2020 following the end of the current PBR term. 3.3.2 Residential Use Per Customer FBC s load forecast for residential customers is based on forecast customer count and use per customer (UPC), consistent with past practice. 58 As exhibited in Figure 3-2 of the Application, normalized after-savings residential UPC has been declining in recent years. 59 FBC states that it believes that factors contributing to declining use rates include, but may not be limited to, increased appliance efficiency, improved building envelopes, conversions to more efficient lighting and general increases in conservation and energy awareness. 60 FBC provides a table with the prior year forecast versus actual normalized after-savings residential UPC for each year from 2007, which demonstrates a forecast variance of 0.88 MWh, 0.83 MWh and 0.62 MWh for 2014, 2015 and 2016, respectively. 61 With respect to the forecast variance in residential load overall between 2014 and 2016, FBC states that the cause of the higher forecast variances in 2014 to 2016 may be related to the unavailability of sufficient historical load information prior to the acquisition of the City of Kelowna. As FBC is now able to use only post-cok historical data in its forecast, this factor has been eliminated from the 2017S and 2018F forecasts. 62 55 ICG Final Argument, p. 3. 56 ICG Final Argument, p. 3. 57 FBC Reply Argument, pp. 6 7. 58 Exhibit B-2, p. 21. 59 Exhibit B-2, p. 25, Figure 3-2. 60 Exhibit B-4, BCMEU IR 4.1. 61 Exhibit B-7, CEC IR 16.1. 62 Exhibit B-3, BCUC IR 13.3. File 55610 FBC 2018 Annual Rate Review Decision 17 of 21