The City of Red Deer 2018-2020 Transmission Facility Owner General Tariff Application March 8, 2019

 
Decision 23872-D01-2019

The City of Red Deer

2018-2020 Transmission Facility Owner
General Tariff Application

March 8, 2019
Alberta Utilities Commission
Decision 23872-D01-2019
The City of Red Deer
2018-2020 Transmission Facility Owner General Tariff Application
Proceeding 23872
March 8, 2019

Published by the:
       Alberta Utilities Commission
       Eau Claire Tower, 1400, 600 Third Avenue S.W.
       Calgary, Alberta
       T2P 0G5

       Telephone: 403-592-8845
       Fax: 403-592-4406

       Website: www.auc.ab.ca
Contents
1     Decision .................................................................................................................................. 1

2     Introduction ........................................................................................................................... 1

3     Background ........................................................................................................................... 2

4     Compliance with outstanding directions from Decision 3599-D01-2015 ......................... 3
         Compliance with Direction 3 ......................................................................................... 3
         Compliance with Direction 6 ......................................................................................... 4
         Compliance with Direction 9 ......................................................................................... 4

5     Discussion of issues ............................................................................................................... 4
           Inflation assumptions ..................................................................................................... 5
            5.1.1 Escalation rates applied to forecast union and non-union salaries and wages .. 6
            5.1.2 Property taxes.................................................................................................... 8
           Full-time equivalents and vacancy rates ...................................................................... 10
           Operating and maintenance expenses .......................................................................... 12
            5.3.1 Substation equipment maintenance expenses ................................................. 12
            5.3.2 All other - Corporate costs allocated to the TFO ............................................ 13
            5.3.3 Direct-assigned capital addition to rate base in 2016 - 209S substation ........ 16
           Depreciation ................................................................................................................. 21

6     Reconciliation and maintenance of deferral and reserve accounts ................................ 23

7     Order .................................................................................................................................... 25

Appendix 1 – Proceeding participants ...................................................................................... 27

Appendix 2 – Summary of Commission directions.................................................................. 28

List of tables

Table 1.       2015-2020 transmission forecast and actual revenue requirement ........................ 3

Table 2.       Red Deer inflation assumptions ................................................................................. 5

Table 3.       2015-2017 approved forecast and actual wage escalation increases for union and
               non-union employees .................................................................................................. 7

Table 4.       Historical property tax expense ................................................................................. 9

Table 5.       Account 562: substation equipment maintenance expenses.................................. 12

Table 6.       CCA table of “all other” corporate services costs.................................................. 14

Table 7.       Calculation of allocation factor for “all other” corporate costs used in the 2015-
               2017 period ................................................................................................................ 15

                                                                                                Decision 23872-D01-2019 (March 8, 2019) • i
Table 8.      Calculation of allocation factor for “all other” corporate costs used in the 2018-
              2020 test periods ........................................................................................................ 15

Table 9.      209S substation 2016 capital addition ..................................................................... 16

Table 10. 2016-2020 depreciation expense............................................................................... 21

ii • Decision 23872-D01-2019 (March 8, 2019)
Alberta Utilities Commission
Calgary, Alberta

The City of Red Deer
2018-2019 Transmission Facility Owner                                    Decision 23872-D01-2019
General Tariff Application                                                      Proceeding 23872

1           Decision

1.     This decision provides the determinations of the Alberta Utilities Commission regarding
an application filed by The City of Red Deer (Red Deer or RD) requesting approval of its
transmission facility owner (TFO) tariff for the 2018-2020 test years.

2.      For the reasons set out in this decision, the Commission has denied Red Deer’s requested
revenue requirement for the years 2018-2020 with respect to property taxes and the full-time
equivalent (FTE) vacancy rate. The Commission directs Red Deer to respond to all directions in
this decision by way of a compliance filing.

2           Introduction

3.     On August 31, 2018, Red Deer filed an application with the Commission requesting
approval of its 2018-2020 TFO general tariff application (GTA or application). In its application,
Red Deer requested approval of its forecast revenue requirements in the amounts of
$4.866 million for 2018, $5.118 million for 2019 and $5.288 million for 2020; 1 and to recover
the approved revenue requirements in a transmission tariff from the Alberta Electric System
Operator (AESO). Red Deer also requested Commission approval of the following:

    •   Reconciliation (and maintenance) of Red Deer’s return on equity deferral account
    •   Reconciliation (and maintenance) of Red Deer’s direct-assign deferral account
    •   Reconciliation (and maintenance) of Red Deer’s hearing cost reserve account
    •   Reconciliation (and maintenance) of Red Deer’s self-insurance reserve account

4.      The Commission issued a notice of application on September 5, 2018, 2 with statements of
intent to participate (SIPs) due September 14, 2018. In their SIPs, parties were to provide a
description of their interest in the proceeding, an explanation of their positions including
information in support of their positions, and submissions on further process, if required.

5.      The Commission received a SIP from the Consumers’ Coalition of Alberta (CCA). 3 In its
SIP, the CCA stated that it sought the opportunity to test the application with a process of written
information requests (IRs) before commenting further on the application. Depending on the
process, the CCA stated that it intended to participate by filing IRs, by providing submissions on
further process and evidence and, if necessary, by filing argument and reply argument.

1
    Exhibit 23872-X0001, Table 1, PDF page 10.
2
    Exhibit 23872-X0005, Notice of application.
3
    Exhibit 23872-X0006, CCA SIP.
                                                                 Decision 23872-D01-2019 (March 8, 2019) • 1
2018-2020 Transmission Facility Owner General Tariff Application                              The City of Red Deer

6.      The Commission reviewed the CCA’s SIP and determined that the application would be
processed by way of a minimal written process. As outlined in Commission Bulletin 2015-09,3
the record-development phase of a minimal written process is expected to take no more than
108 calendar days from the receipt of application, assuming a complete application is received,
and there are no procedural delays. The Commission set out the following process schedule for
consideration of the application: 4

    Process step                                                                   Deadline
    IRs to Red Deer                                                              October 18, 2018
    Information responses from Red Deer                                         November 2, 2018
    Argument                                                                    November 22, 2018
    Reply argument                                                              December 10, 2018

7.   The Commission considers the close of record for this proceeding to have been
December 10, 2018, when reply arguments were received from Red Deer and the CCA.

8.       In reaching the determinations throughout this decision, the Commission has considered
all relevant materials comprising the record of this proceeding. Accordingly, references in this
decision to specific materials are intended to assist the reader in understanding the Commission’s
reasoning relating to a particular matter and should not be taken as an indication that the
Commission did not consider all relevant portions of the record with respect to a particular
matter.

3              Background

9.     On October 19, 2017, the Commission issued Decision 22992-D01-2017, 5 which
approved Red Deer’s 2018 transmission facility owner tariff, on an interim basis, in the amount
of $360,022 per month, effective January 1, 2018.

10.     In the current application, Red Deer’s forecast 2018-2020 revenue requirements indicate
an average annual increase of 7.0 per cent compared to its 2017 approved revenue requirement.
Red Deer explained that the primary factors for the increases in the 2018-2020 revenue
requirements were annual inflation rates, the planned replacement of transformers, and upgrades
to protection and control systems. Red Deer further explained that all of these factors affected its
forecast operating expense, depreciation, and cost of capital. Red Deer provided the following
table:

4
     Exhibit 23872-X0007, AUC letter - Process schedule.
5
     Decision 22992-D01-2017: City of Red Deer, 2018 Interim Transmission Facility Owner Tariff,
     Proceeding 22992, October 19, 2017.

2 • Decision 23872-D01-2019 (March 8, 2019)
2018-2020 Transmission Facility Owner General Tariff Application                                            The City of Red Deer

Table 1.           2015-2020 transmission forecast and actual revenue requirement
                                        2015           2016         2017            2018           2019           2020
    Revenue requirement
                                       Actual         Actual       Actual         Forecast       Forecast       Forecast
                                                                         ($000)
    Operating Costs                   2,339.8           2,555.0    2,685.0          3,072.7      3,134.3          3,078.9
    Depreciation                        616.4             689.0     774.5           1,004.5      1,078.6          1,200.9
    Return on Rate Base                 537.7             647.4     860.8             867.3        904.6          1,008.1
    Income Tax Expense                       0.0            0.0        0.0              0.0          0.0              0.0
    Deferral & Reserve Accounts          -40.9              0.0        0.0            -79.0          0.0              0.0
    Net Revenue Requirement           3,453.0           3,891.4    4,320.3   6
                                                                                    4,865.6      5,117.5          5,287.9

    Monthly Tariff ($)                 287,751        324,282      360,022         405,467       426,458           440,662
Source: 23872-X0001, Table 1, PDF page 10.

4                  Compliance with outstanding directions from Decision 3599-D01-2015

11.     Red Deer has, in its previous compliance filing and as determined by the Commission
in Decision 20802-D01-2015, 7 complied with directions 1, 2, 4, 5, 7, 8, 10 and 11 of
Decision 3599-D01-2015. 8 Red Deer stated that, where applicable, these directions continue to
apply in the current application.

12.     In Section 2 of its application, Red Deer provided responses to the remaining outstanding
directions (directions 3, 6 and 9) from Decision 3599-D01-2015.

                   Compliance with Direction 3
13.    In Direction 3 of Decision 3599-D01-2015, Red Deer was directed to update its
contribution amortization rate using its existing contribution amortization rate spreadsheet and to
update and true up any changes to the contribution amortization rate that may result from its next
depreciation study.

14.    In response to this direction, Red Deer included in its application updated contribution
amortization rates using the weighted average of depreciation rates of its contributed assets as
determined in its depreciation study.

Commission findings
15.         The Commission is satisfied that Red Deer has complied with Direction 3.

6
       Annual revenue at existing rates is $4,320,300.
7
       Decision 20802-D01-2015: The City of Red Deer, Compliance Filing to Decision 3599-D01-2015,
       Proceeding 20802, October 23, 2015.
8
       Decision 3599-D01-2015: The City of Red Deer, 2015-2017 Transmission Facility Owner General Tariff
       Application, Proceeding 3599, Application 1611117-1, July 7, 2015.

                                                                                    Decision 23872-D01-2019 (March 8, 2019) • 3
2018-2020 Transmission Facility Owner General Tariff Application                               The City of Red Deer

               Compliance with Direction 6
16.       In Direction 6 of Decision 3599-D01-2015, the Commission stated:

          Subject to the factor-specific issues identified below, the Commission finds that
          Red Deer’s continued use of the allocation methodology originally approved in
          Decision 2005-149[ 9] is reasonable in the circumstances. However, the Commission
          directs Red Deer, in its next GTA, to provide detailed costing under each section of its
          application in order to demonstrate a clear understanding of the cost drivers, costs
          allocators, and the means to better reconcile the costs under each section of the
          application with Red Deer’s minimum filing requirement (MFR) schedules.

17.    The factor-specific issues related to this direction were outlined in Section 3.7.3 of
Decision 3599-D01-2015.

18.     In response, Red Deer reorganized and included a tab (Index Tab) in its MFR schedules
to demonstrate all relevant Electric Light and Power (EL&P) Department accounts and their
classification and allocation to its TFO Uniform System of Accounts (USA). The Index Tab was
organized by USA number, and provided each allocation used to construct the USA from its
originating source.

Commission findings
19.       The Commission is satisfied that Red Deer has complied with Direction 6.

               Compliance with Direction 9
20.       In Direction 9 of Decision 3599-D01-2015, the Commission stated:

          116.     Most of these recommendations, however, were not introduced through IR or
          intervener evidence. The 209S project is a direct-assigned project subject to deferral
          treatment. Consequently, Red Deer, like all other TFOs, is required to demonstrate the
          prudence of its final costs. This could include testing of decision making, based on the
          best information at the time, to justify the level of cost. The Commission therefore directs
          Red Deer to incorporate CCA recommendations (b) and (c) when it demonstrates the
          prudence of its final costs of substation 209S in a future application.

Commission findings
21.    A determination regarding Red Deer’s compliance with Direction 9 of
Decision 3599-D01-2015 is found in Section 5.3.3 of this decision.

5            Discussion of issues

22.     The following sections address issues or concerns raised by interveners or identified by
the Commission in this proceeding and sets out the Commission’s determinations on those
issues.

9
      Decision 2005-149: City of Red Deer, 2006-2008 Transmission Facility Owner Tariff, Application 1402729-1,
      December 23, 2005.

4 • Decision 23872-D01-2019 (March 8, 2019)
2018-2020 Transmission Facility Owner General Tariff Application                                  The City of Red Deer

               Inflation assumptions
23.    Red Deer provided the following table of inflation assumptions incorporated into its
application:

Table 2.       Red Deer inflation assumptions
                                            2018             2019   2020
                                                            (%)
 Salary & wages, union                       2.0              2.0    2.0
 Salary & wages, non-union                   2.0              2.0    2.0
 Materials                                   2.0              2.0    2.0
 Contractors                                 2.0              2.0    2.0
 General – other                             2.0              2.0    2.0
 Property tax                                 -               6.0    6.0
Source: Exhibit 23872-X0001, Table 3, PDF page 12.

24.     Apart from the annual inflation rate applied to property taxes, which is discussed in
Section 5.1.2 below, Red Deer applied a general inflation factor of two per cent to all
components of its 2018-2020 operating expenses. Given the magnitude the dollar amounts
affected by these inflation factors, Red Deer considered it prudent and cost-effective to use
professional judgement in selecting a reasonable, conservative and simplified inflation rate rather
than to undertake a detailed analysis. 10

25.        In response to Red Deer-AUC-2018OCT18-003(a), Red Deer stated:

           (a) Red Deer’s inflation factors are selected by utility personnel who have direct
           experience with utility operations and the underlying drivers of expenses that affect the
           utility. They understand what affects those prices, and how the prices change over time.
           The inflation drivers that impact the TFO are not entirely the same as those that affect the
           economy province wide (such as oil prices), so RD does not rely solely or primarily on
           economic forecast reports, etc. to determine inflation factors. That said, escalation factors
           proposed by ATCO in its 2018-2020 TFO General Tariff Application and the CPI
           [Consumer Price Index] in Government of Alberta 2018-19 First Quarter Update-
           Economic Outlook report (August 2018) were considered as comparables to provide
           assurance on the overall reasonableness and prudence of the 2018-2020 inflation factors.

           More relevant to forecasting the escalation rates is the City’s labour agreement with the
           International Brotherhood of Electrical Workers (IBEW). Negotiated IBEW wage
           increases are greatly influenced by agreements for larger and privately-owned electric
           utilities, which are typically finalized before any negotiations begin with the City. On
           March 6, 2017, the City of Red Deer announced that an agreement on a labour contract
           has been reached with IBEW for 2017 and 2018. The agreed-upon wage adjustment was
           1.75 percent in 2017 and 2.00 percent in 2018. Because the agreed-upon wage
           adjustments for each year represents base salary increases and does not include step
           increases, Red Deer considers the applied for 2.00 percent inflation factor to be
           reasonable. This assumption is consistent with the Commission’s Decision regarding RD
           2015-17 GTA application, whereby they approved an escalation rate that included
           0.25 per cent to represent step increases. Additionally, RD takes into account the
           historical data of union salary increases (average of 2.7% for 2013-2018). 11

10
      Exhibit 23872-X0001, application, paragraph 19.
11
      Exhibit 23872-X0010, Red Deer-AUC-2018OCT18-003(a), PDF page 8.

                                                                           Decision 23872-D01-2019 (March 8, 2019) • 5
2018-2020 Transmission Facility Owner General Tariff Application                    The City of Red Deer

26.      In argument, Red Deer submitted that labour costs are largely fixed and known because
they are driven primarily by the agreement between Red Deer and IBEW. The IBEW agreement,
which is in place until 2019, drives the cost of union and management labour. Red Deer stated
that it faces pressure to increase management labour at the same rate, or close to the same rate as
union labour in order to avoid wage compaction.

27.      Red Deer explained that the broader economic trends that influence Red Deer’s costs are
more industry specific and localized. Labour costs, both union and non-union, are influenced by
Red Deer’s contract with IBEW, which is negotiated after a contract is in place with the larger
utilities. Red Deer explained that contractor costs are largely driven by industry-wide demand of
larger Alberta utilities. Given that the extensive transmission builds planned for the province
have largely been completed, Red Deer does not expect the contractor costs to increase at a
materially greater rate than other expenses.

28.     In consideration of the industry specific drivers of its inflation assumption, Red Deer
argued that it is prudent to continue using its longstanding practice of relying on professional
judgement to select reasonable rates that reflect long-term trends, current labour agreements,
historical experience, current operation practices and firm contractor quotes. Other TFO’s
inflation assumptions and the Alberta Economic Outlook report are useful comparators in order
to offer assurance of the general reasonableness of Red Deer inflation factors, but ultimately, an
analysis that incorporates industry-specific factors and fixed costs is most appropriate for
determining inflation factors. 12

Commission findings
29.     The Commission notes that Red Deer continued to rely on professional judgement in its
selection of inflation rates that reflect the current trends and operating conditions under which
Red Deer conducts its business. Furthermore, as useful comparators, Red Deer examined recent
escalation factors proposed by a comparable TFO in Alberta and the Government of Alberta CPI
Economic Outlook report from August 2018. The Commission considers that Red Deer’s
consideration of these factors provides assurance as to the overall reasonableness of the
2018-2020 inflation rate of two per cent.

30.      For these reasons, the Commission finds the inflation rate of two per cent for union and
non-union employees, materials, contractor and general-other is reasonable. Red Deer’s inflation
rate of two per cent is approved.

5.1.1          Escalation rates applied to forecast union and non-union salaries and wages
31.     As shown in Table 2 above, Red Deer proposed an inflation rate of two per cent for union
and non-union salaries and wages for each of the 2018-2020 test years. In its response to
RD-CCA-2018OCT18-001(f), 13 Red Deer provided a table showing that in 2016 and 2017, the
forecast increases were approved on the basis of an effective date coincident with the beginning
of the test year, whereas the effective date for actual increases was July 1:

12
     Exhibit 23872-X0015, Red Deer argument, paragraphs 9-11.
13
     Exhibit 23872-X0013, RD-CCA2018OCT18-001(f), PDF page 5.

6 • Decision 23872-D01-2019 (March 8, 2019)
2018-2020 Transmission Facility Owner General Tariff Application                                       The City of Red Deer

Table 3.       2015-2017 approved forecast and actual wage escalation increases for union and non-union
               employees
                                           2015                    2016        2017
                                                                    (%)
 Union
 Approved forecast                         3.75                3.75            3.75*
 Actual                                    3.50                3.50            1.75**
 Non-Union
 Approved forecast                          3.0                 3.0            3.0
 Actual                                     2.8              1.5 (July 1)   1.25 (July 1)
Source: Exhibit 23872-X0013, RD-CCA2018OCT18-001(f).
*Includes a forecast of step increases.
**Does not include step increases.

32.     The CCA argued that if the utility’s forecast inflation rate increase is effective July 1 of
each year, the forecasts should be revised to reflect that date. To the extent the July 1 effective
date for inflation rate increases is expected to continue into the test years and, to the extent this
lag has not been reflected in the forecasts, the CCA recommended that the forecasts for union
and non-union salaries and wages be adjusted to reflect the July 1 effective date for inflation rate
increases. 14

33.     In reply argument, Red Deer argued that it sums all of the factors that can affect the total
annual cost, including step increases, union agreements and cost-of-living adjustments. Red Deer
stated that step increases occur year-round and non-union increases are typically completed
during times that reflect a new operating budget. If the increases were based on a July 1 effective
date, Red Deer argued that a higher escalation rate would have been proposed to reflect all costs
more appropriately. Red Deer submitted that the CCA provided no evidence to support using an
effective date of July 1 and did not show how this would result in a more accurate forecast. 15

Commission findings
34.     The Commission has considered the argument of the CCA and response provided by
Red Deer. While the Commission agrees in principle with the CCA, that taking into account
known dates when reflecting increases in forecasts prospectively should result in more accuracy,
in the case of the 2018-2020 test period, the effort and effect of doing so would likely result in
negligible net benefits. This is due in part to the added complexity and effort associated with
applying wage increases to both operating and capital expense forecasts half-way through the
2018 test year and, in part, because a single inflation rate of two per cent has been applied for
forecasting purposes from January 1, 2018 through to December 31, 2020. The Commission
considers that beyond a six-month period between January 1, 2018 to July 1, 2018, there is no
material benefit to be gained from applying an increase at mid-year as only a single inflation rate
of two per cent has been applied to forecast union and non-union salaries and wages through to
the end of the test period.

14
     Exhibit 23872-X0016, CCA argument, paragraph 17.
15
     Exhibit 23872-X0017, Red Deer reply argument, paragraphs 7-8.

                                                                                Decision 23872-D01-2019 (March 8, 2019) • 7
2018-2020 Transmission Facility Owner General Tariff Application                          The City of Red Deer

35.     For these reasons, the Commission is not convinced that using a mid-year effective date
for inflation is reasonable to forecast union and non-union salary increases. Therefore, the
CCA’s recommendation is denied.

5.1.2          Property taxes
36.    Red Deer’s forecast property taxes are $557,000 in 2018, $591,000 in 2019 and $626,000
in 2020. Red Deer’s actual 2017 property taxes were $335,000.

37.     Red Deer explained that property taxes are set based on the assessed property value (as
determined by the provincial Ministry of Municipal Affairs) and the mill rate (as set by Red Deer
City Council). Red Deer indicated that the “2018 property tax is based on the tax notices for
transmission substations and the Civic Yards. Consistent with the City’s approach in previous
GTA’s, 2019-2020 property taxes were forecast as whole rather than two separate variables. The
2019-20 property tax forecasts are developed based on 2018 actual property taxes and an annual
inflation of 6.0%.” 16

38.       Red Deer provided the reasons for the property tax increases as follows:

          As a result of the review of the historical data and taking into consideration that the
          completion of “RTU [remote terminal units] and P&C [protection and control]
          Replacement” project at RD17S substation in 2017 and RD’s plan to replace two power
          transformers in 2019 and 2020 would result in an increase in the assessed value of
          substations, RD has considered a slightly higher inflation factor (compared to the
          previous applications) to forecast 2019-20 property taxes. 17

39.     Given Red Deer’s earlier statement that the 2018 property tax is based on the tax notices
for transmission substations and the Civic Yards, the CCA argued that Red Deer has failed to
provide the requested information and, therefore, did not support the 66 per cent ($557/$335-1)
increase in property taxes forecast for 2018 compared to 2017 actual amounts.

40.     Consistent with cost causation principles and Red Deer’s past practice, the CCA
maintained that the property taxes associated with the contributed portion of the cost of the 209S
substation should be attributed to distribution, since the contribution amount paid by the EL&P
distribution function is above the AESO’s investment levels for facilities solely required by the
distribution function on which the distribution function typically earns a return on rate base.

41.     The 209S substation net addition to Red Deer’s rate base in 2016 is $5.3 million
($17.1 million less a distribution system contribution of $11.8 million). The CCA indicated that,
based on the 66 per cent increase relative to 2017 actual, it appeared that Red Deer may have
attributed the property taxes associated with the gross cost (or value) of the 209S substation to
the TFO in 2018, whereas the TFO appears to have been responsible for only the net cost (or
value) of the asset in the years 2016 and 2017. The CCA submitted that Red Deer must confirm
whether there has been a change in property tax attribution and explain why there is a 66 per cent
increase in property taxes in 2018 relative to 2017.

16
      Exhibit 23872-X0001, application, paragraph 81.
17
      Exhibit 23872-X0001, application, paragraph 84.

8 • Decision 23872-D01-2019 (March 8, 2019)
2018-2020 Transmission Facility Owner General Tariff Application                                          The City of Red Deer

42.    The CCA noted in the table provided by Red Deer that increases related to the mill rate
have not followed a consistent pattern:

Table 4.       Historical property tax expense
                                                     2008    2009    2010   2011   2012 2013      2014   2015    2016    2017
                                                                                     ($000)
 Property tax expense                                 154     162    149    163     168 175       199     210     331    335

 Increase due to mill rate increase                           (11)    0      3     (2)      1      (3)     7      11       7
 Increase due to assessed value                                19    (13)    11     7       6      27      4      110     (3)
 Increase from prior year                                      8     (13)    14     5       7      24      11     121      4
Source: Exhibit 23872-X0010, RD-CCA-2018OCT18-001(h), PDF page 5.

43.    Based on a mill rate increase of 3.4 per cent in 2016 and 2.1 per cent in 2017, 18 the CCA
recommended the mill rate increase should be limited to three per cent in each of the years 2018,
2019 and 2020. 19

44.     With regard to assessed value increases, the table above shows that the 2016 additions to
rate base, in the amount of $5.3 million, resulted in an increase of $110,000 in property tax
related to assessed value. Using this as an approximate standard for comparison, with the
additions to rate base of $3.7 million in 2019 and $2.7 million in 2020, the CCA asserted that the
proportionate increases in property taxes related to assessed value could be estimated at $78,000
($110,000 * $3.7/$5.2) in 2019 and $57,000 ($110,000 * 2.7/$5.2) in 2020.

45.    Red Deer indicated that as a result of the review of the historical data and taking into
consideration the completion of the RTU and the P&C replacement project at RD17S substation
in 2017, and Red Deer’s plan to replace two power transformers in 2019 and 2020, Red Deer has
considered a slightly higher inflation factor (compared to the previous applications) to forecast
2019-2020 property taxes, with the objective of being accurate over a three-year period when
considering the trend for total payable property tax.

46.     Red Deer argued that neither the mill rate nor the assessed value follow a consistent
pattern and are difficult to forecast. As a result, Red Deer submitted that the compound annual
average property tax increase since 2012 is 8.8 per cent even after the removal of the effect of
the new substation. Red Deer argued the six per cent increase for 2019 and 2020 is, therefore,
reasonable.

47.    Red Deer maintained that the CCA recommendation that property taxes for the test years
be adjusted so mill rate increases in each year do not exceed three per cent per year, and that the
assessed value increases do not exceed $78,000 in 2019 and $57,000 in 2020, are not supported
by evidence. Further, Red Deer indicated that it does not have the information necessary to
support a separate mill rate and assessed value based property tax forecast.

48.    Red Deer indicated that a contribution made to a transmission function by a distribution
function does not mean that the distribution function has any ownership of the substation and
should therefore pay property tax. Tax expense is the responsibility of the owner of the property.

18
     Exhibit 23872-X0010, RD-CCA-2018OCT18-001(h), PDF page 5.
19
     Exhibit 23872-X0016, CCA argument, paragraph 13.

                                                                                   Decision 23872-D01-2019 (March 8, 2019) • 9
2018-2020 Transmission Facility Owner General Tariff Application                           The City of Red Deer

Commission findings
49.    The Commission agrees with the position of Red Deer that the responsibility for payment
of property taxes rests with the owner regardless of whether or not the distribution function
provided a contribution to a capital project that has been constructed by the transmission
function. For this reason, the Commission denies the CCA’s request for an adjustment to Red
Deer’s forecast property taxes on the basis that some portion of the forecast is attributable to
EL&P’s distribution function.

50.     The Commission has examined the explanations provided by Red Deer for the increase in
actual property taxes in the years 2016 and 2017. The Commission is satisfied the increases were
the result of actual rate base additions in the amounts of $17 million and $2 million for the years
2016 and 2017, 20 respectively, which influence the assessed value of the assets subject to
property taxes.

51.     For each of 2018, 2019 and 2020, Red Deer has forecast rate base additions in the
amounts of $0 million, $4 million and $3 million, 21 respectively, that will similarly influence
forecast property tax. Notwithstanding Red Deer’s statement that the 2018 property tax forecast
was based on the tax notices for transmission substations and the Civic Yards, the Commission is
concerned with the quantum of the forecast property tax increase of $222,000 compared to 2017,
given the 209S substation was placed into service in 2016 and given the absence of any rate base
additions in 2018.

52.    The Commission considers that Red Deer has failed to justify its 2018 property tax
forecast. Red Deer is directed to revise its 2018 forecast property tax to reflect its actual 2018
property tax paid.

53.     With respect to 2019 and 2020, the Commission finds that Red Deer’s forecast property
tax increases of six per cent in each year is reasonable. Red Deer is directed to revise its forecast
property taxes in its compliance filing to reflect an increase of six per cent applied to the 2018
actual property tax paid, and an additional increase of six per cent applied to the revised 2019
forecast property tax, for each of 2019 and 2020, respectively.

               Full-time equivalents and vacancy rates
54.     In its application, Red Deer proposed a vacancy rate of zero per cent, contrary to the
Commission’s direction from Decision 3599-D01-2015 that a vacancy rate of one per cent
should be used. Red Deer explained that its vacancy rate forecast of zero per cent for the test
years is based on historical vacancy rates of zero per cent in 2015 and 2017, and of 0.2 per cent
in 2016. Red Deer also stated that it did not have any proposed full-time equivalent (FTE)
increases for engineering and supervision in the 2018 to 2020 test years.

55.       In response to Red Deer-AUC-2018OCT18-005(d), Red Deer stated:

          As per AUC’s direction in Decision 3599-D01-2015 to use a vacancy rate of 1%, RD
          reduced its forecast Engineering & Supervision costs by 1% in the final 2015-17 tariff
          application. However, the only position vacancy during 2015-2017 period was for one
          General Foreman position for about four months in 2016. Since the TFO allocation for

20
      Exhibit 23872-X0001, Table 23, PDF page 51.
21
      Exhibit 23872-X0001, Table 24, PDF page 52.

10 • Decision 23872-D01-2019 (March 8, 2019)
2018-2020 Transmission Facility Owner General Tariff Application                                 The City of Red Deer

          this position is only 5% (0.05 FTE) compared to total FTE of 7.4 (TFO Supervision &
          Engineering) the position being vacant for about four months is equivalent to only 0.2%
          vacancy rate in 2016. In addition, no position was vacant in 2015 and 2017. 22

56.    Further, Red Deer noted that its practice is to backfill vacant positions with other internal
TFO or distribution facility operator (DFO) staff, whether for cross-training purposes if it is a
retirement, or for operational purposes. In this way, an expected vacancy may sometimes mean
more staff expense, not less. In other words, no TFO position would be left vacant for any period
that would in Red Deer’s view justify a vacancy rate consideration. In addition, unplanned
vacancies can incur additional costs if the role is backfilled through overtime TFO labour. 23

57.      In response to a Commission IR, Red Deer stated that the safety coordinator position was
filled in March instead of June in 2015. Consequently, the position was filled for 10 months
instead of the six months forecast. Red Deer also stated that it does not expect any employee
retirements over the forecast period. 24

Commission findings
58.    In the application, Red Deer stated that it did not anticipate any changes to the FTEs for
the 2018-2020 test period and the forecast supervision and engineering costs for the test years
were based on 2017 actual amounts adjusted for inflation. 25

59.     Table 6 in the application listed 15 engineering and supervision positions, and the
percentages allocated to the TFO and DFO for each such position. The Commission observes
that only three of those positions charge 100 per cent of their time to transmission. The
remainder divide their time between the TFO and DFO functions. 26

60.       In paragraph 49 of Decision 3599-D01-2015, the Commission stated that:

          … Red Deer noted that the Safety Coordinator position originally forecast to be filled in
          2012 was not filled until 2014 and was then vacated again shortly thereafter. In 2012, the
          new Electrical Technologist position was filled in June instead of January. In 2013 and
          2014, the Market Support Specialist position was vacant. The positions are shown in
          Table 6 of page 24 of the application.

61.       In paragraph 53 of Decision 3599-D01-2015, the Commission stated that:

          Based on the above, the Commission concludes that Red Deer undergoes periods where
          vacant positons exist. It is also clear from the shared positions highlighted in Table 6 that
          the number of pending retirements that may affect Red Deer’s core business (DFO) will
          similarly affect the TFO business. The Commission considers that the application of a
          vacancy rate is warranted. Historically, Red Deer has not provided such a rate, and given
          the evidence of RD, the vacancy rate should be low. The Commission finds that a
          vacancy rate of 1.0 per cent is reasonable. The Commission directs Red Deer to use a
          vacancy rate of 1.0 per cent to reflect vacancies in its compliance filing.

22
      Exhibit 23872-X0010, Red Deer-AUC-2018OCT18-005(d), PDF pages 33-34.
23
      Exhibit 23872-X0015, Red Deer argument, paragraphs 12-14.
24
      Exhibit 23872-X0010, Red Deer-AUC-2018OCT18-005(6)(b) and (d), PDF page 35.
25
      Exhibit 23872-X0001, application, paragraph 47.
26
      Exhibit 23872-X0001, application, Table 6, paragraph 48.

                                                                         Decision 23872-D01-2019 (March 8, 2019) • 11
2018-2020 Transmission Facility Owner General Tariff Application                               The City of Red Deer

62.      Notwithstanding Red Deer’s submission that no form of vacancy rate was attributed to its
FTEs over the test periods, the Commission continues to conclude that Red Deer does have a
history of periods where vacant positions exist. Despite no positions being vacant in 2015 and in
2017, one position for a general foreman was vacant for four months in 2016. The Commission
also observes that the position for a safety coordinator originally forecast to be filled in 2012 was
not filled until 2015. Accordingly, the Commission continues to find that an application of a
vacancy rate is warranted and directs Red Deer to revise its vacancy rate to 1.0 per cent for the
years 2018-2020 in its compliance filing to this proceeding.

               Operating and maintenance expenses
5.3.1          Substation equipment maintenance expenses
63.   Red Deer provided the following breakdown of substation equipment maintenance
expenses for Account 562:

Table 5.       Account 562: substation equipment maintenance expenses
                                               Account 562: substation equipment expenses
                                              2018                 2019                2020
                                                                 ($000)
 Labour                                       153                   156                159
 Contractor                                   241                   232                 92
 Other                                        156                   159                163
 Total                                        550                   548                414
Source: Exhibit 23872-X0001, application, Table 12, PDF page 28.

64.      In argument, the CCA identified that the total expense for Account 562 was $400,000 in
2017. The CCA also noted that in 2016, Red Deer added the 209S substation and, therefore, the
overall substation expense increase in the 2018-2019 test years reflect the increases associated
with that addition. However, the major increase in Account 562 in 2018, relative to 2017, was
related to contractor expense. In 2015, 2016 and 2017, the actual contractor expenses were
$150,000, $108,000 and $143,000 respectively. In 2018 and 2019, contractor expenses were
forecast to increase to $241,000 and $232,000, respectively, and then decrease to $92,000 in
2020. 27

65.      In response to Red Deer-AUC-2018OCT18-010,28 Red Deer provided details with respect
to its substation maintenance contracted services plan for the years 2018-2020.

66.     In argument, the CCA identified a difference of $22,000 between the contractor expense
as forecast for the test years and the amounts shown in the contracted services plan. 29

67.   Absent a further justification from Red Deer for the $22,000 difference in contract
expenses, the CCA recommended that this amount be disallowed from Account 562 for each test
year.

27
     Exhibit 23872-X0016, CCA argument, paragraphs 19-20.
28
     Exhibit 23872-X0011, Red Deer-AUC-2018OCT18-010, Tab: Red Deer-AUC-2018OCT18-010(b).
29
     Exhibit 23872-X0016, CCA argument, paragraph 21 referring to Exhibit 23872-X0011, Red Deer-AUC-
     2018OCT18-010, Tab: Red Deer-AUC-2018OCT18-010(b). The total amounts of $219,000; $210,000 and
     $70,000 for the years 2018, 2019 and 2020, respectively, were derived by summing line numbers 11, 15, 24 and
     27 for each year.

12 • Decision 23872-D01-2019 (March 8, 2019)
2018-2020 Transmission Facility Owner General Tariff Application                                   The City of Red Deer

68.     In response, Red Deer argued that the CCA’s recommendation appears to be based on the
mistaken presumption that Red Deer had not provided an explanation for the $22,000 difference
associated with these contractor expenses. However, Red Deer stated in its application that it
provided a detailed breakdown of its maintenance contracted services for all four transmission
substations with a forecast cost of $22,000 each year to be shared between all four substations
($5,500 per substation per year). 30 Red Deer attributed this difference to miscellaneous items,
including maintenance services such as landscaping, weed control, snow removal, fence repair,
and other unplanned general repairs. Red Deer stated that the CCA did not ask for any further
explanations during the information request stage as $22,000 is approximately $5,500 per
substation per year, which Red Deer submitted was reasonable. 31

Commission findings
69.     The Commission observes that Red Deer provided a detailed breakdown of contractor
costs for maintenance services for each of its four transmission substations 14S, 15S, 17S and
209S as found in tables 13(a) to 13(d) of the application. 32 Red Deer explained that each table
identified the maintenance contracted services for the four transmission substations, excluding
miscellaneous maintenance with a forecast cost of $22,000 each year to be shared between all
four substations. Furthermore, Red Deer identified a miscellaneous maintenance service cost in
the amount of $22,000 in Table 13 of the application for landscaping, weed control, snow
removal, fence repair and other unplanned general repairs.

70.     The Commission finds that Red Deer has provided a reasonable explanation for its
substation equipment expenses including the portion related to its contracted services and the
component related to miscellaneous maintenance service costs. Red Deer’s substation equipment
maintenance expenses in the amounts of $550,000, $548,000 and $414,000 for the years 2018,
2019 and 2020, respectively, are approved.

5.3.2          All other - Corporate costs allocated to the TFO
71.    The CCA identified in argument that items included in the “all other” category of
corporate services costs are for accounting, offices of the mayor and the city manager, city clerk
and council, development services director and other items such as postage and banking. In
response to an IR to the CCA, Red Deer provided the following table illustrating the total
corporate services costs for Red Deer’s EL&P and the amounts allocated to each of the
transmission and distribution function:

30
     Exhibit 23872-X0001, application, paragraphs 65-66.
31
     Exhibit 23872-X0017, CCA reply argument, paragraph 10.
32
     Exhibit 23872-X0001, application, Tables 13(a)-13(d), paragraph 65.

                                                                           Decision 23872-D01-2019 (March 8, 2019) • 13
2018-2020 Transmission Facility Owner General Tariff Application                                   The City of Red Deer

Table 6.       CCA table of “all other” corporate services costs
                                                                     All other corporate services costs
                                                            2015    2016        2017       2018     2019       2020
                                                                                    ($000)
 EL&P total allocation                                     729.4   838.6       840.2      859.1     876.3     893.8
 Transmission allocation                                   167.8   192.9       193.2      219.9     224.3     228.8
 Distribution allocation                                   561.6   645.7       647.0      639.2     652.0     665.0
 Transmission per cent of total EL&P                       23.0%   23.0%       23.0%     25.6%      25.6%     25.6%
 Increase in transmission allocation year over year                15.0%       0.2%      13.8%      2.0%      2.0%
Source: Exhibit 23872-X0016, RD-CCA-2018OCT-18-007, PDF page 8.

72.  The CCA noted significant increases in the transmission allocation for 2016 and 2018. In
RD-CCA-2018OCT18-007, Red Deer provided the following explanation for the 2016 increase:

           All Other, Corporate – The $109,200 increase is the result of a $45,000 increase in the
           municipal support cost for Mayor and City Manager, $22,000 increase in the municipal
           support cost for City Clerk and Council, $20,100 increase in the municipal corporate cost
           for Accounting, and a $17,100 increase in the municipal support cost for other activities,
           such as bank charges, security services, advertising, and other miscellaneous services. 33

73.     The CCA argued that in contrast to the 2016 increase, the 2018 increase is primarily due
to a change in the allocation per cent between the transmission and distribution functions.
Between 2015 and 2017, the CCA identified that Red Deer allocated 23 per cent of EL&P’s
share of “all other” corporate services costs to the transmission function. However, from 2018 to
2020, Red Deer proposed to allocate 25.6 per cent of the EL&P share of this same type of
corporate services cost to the transmission function. The CCA recommended that the 23 per cent
allocation factor that was used in the 2015-2017 period continue to apply for the allocation of
corporate services costs to the transmission function in the 2018-2020 test years because
Red Deer had failed to justify the allocation increase. 34

74.      In response, Red Deer submitted that it continues to use the allocation methods first
approved by the Commission in Decision 2005-149. Currently, as the allocation factors being
used for the 2018-2020 test years has been calculated based on 2017 actual data, similar to the
manner in which 2014 actual data was used for the period 2015-2017 consistent with
Decision 3599-D01-2015. 35 Red Deer provided the following underlying data for the calculation
of its allocation factor for “All Other, Corporate” for the 2015-2017 period and for the
2018-2020 test years, as shown in the following two tables:

33
     Exhibit 23872-X0013, RD-CCA-2018OCT18-007.
34
     Exhibit 23872-X0016, CCA argument, paragraph 25.
35
     Decision 3599-D01-2015, paragraph 99.

14 • Decision 23872-D01-2019 (March 8, 2019)
2018-2020 Transmission Facility Owner General Tariff Application                                                The City of Red Deer

Table 7.       Calculation of allocation factor for “all other” corporate costs used in the 2015-2017 period
                               2014 approved allocation               2014 corporate cost            2014 corporate cost
 Allocation method
                                        factor                              (T&D)                 allocated to transmission
                                         (%)                                                ($)
 FTE                                     17.5                              143,876                           25,141
 FTE, Office                             30.5                              402,550                          122,945
 FTE, Field                               2.9                                 0                                   0
 Gross Assets                            16.5                              351,069                           58,073
 Total                                                                     897,495                          206,159
Source: Exhibit 23872-X0018, Red Deer reply argument, paragraph 13.

75.   Red Deer calculated the 2015-2017 allocation factors for its corporate costs as
$206,159 / $897,495 * 100 = 23.0 per cent. 36

Table 8.       Calculation of allocation factor for “all other” corporate costs used in the 2018-2020 test periods
                               2017 approved allocation               2017 corporate cost            2017 corporate cost
 Allocation method
                                        factor                              (T&D)                 allocated to transmission
                                         (%)                                                ($)
 FTE                                     17.6                              163,563                            28,850
 FTE, Office                             33.0                              379,915                           125,314
 FTE, Field                               3.4                                 0                               0
 Gross Assets                            19.9                              264,570                            52,626
 Total                                                                     808,049                           206,791
Source: Exhibit 23872-X0018, Red Deer reply argument, paragraph 13.

76.    Red Deer calculated the 2018-2020 allocation factors for “all other” corporate costs as
$206,791 / $808,049 * 100 = 25.6 per cent. 37

77.     Red Deer maintained that using a 23 per cent allocation factor for “all other” corporate
costs would be inconsistent with the Commission’s determination set out in Decision 2013-111.
Furthermore, Red Deer indicated that the CCA did not provide any evidence demonstrating that
23 per cent would be a more accurate forecast. 38

Commission findings
78.     The Commission has reviewed Red Deer’s calculation of its allocation factor for the
category of “all other” corporate costs, including the quantum of FTEs and assets informing the
allocation percentages as well as the corporate dollars subject to allocation.

79.     The Commission finds that Red Deer has continued to apply the methodology approved
by the Commission in Decision 3599-D01-2015, which required Red Deer to determine its
2015-2017 forecast allocated corporate costs based on 2014 actual allocators. In the current
application, Red Deer has used 2017 actual data in its determination of the 2018-2020 allocation
factors applicable to corporate costs, which includes the category of “all other” corporate costs.
The Commission approves Red Deer’s “all other” corporate cost allocator of 25.6 per cent and
related costs.

36
     Exhibit 23872-X0018, Red Deer reply argument, paragraph 13.
37
     Exhibit 23872-X0018, Red Deer reply argument, paragraph 13.
38
     Exhibit 23872-X0018, Red Deer reply argument, paragraph 14.

                                                                                      Decision 23872-D01-2019 (March 8, 2019) • 15
2018-2020 Transmission Facility Owner General Tariff Application                                       The City of Red Deer

5.3.3          Direct-assigned capital addition to rate base in 2016 - 209S substation
80.    In this section and further to the information provided in Section 4.3 above, the
Commission considers Red Deer’s compliance with Direction 9 from Decision 3599-D01-2015
and the prudence of Red Deer’s expenditures with respect to its 2016 direct-assigned capital
addition of the 209S substation.

81.     Red Deer provided the forecast and actual capital costs related to its 209S substation
project in Table 23(a) of its application. Red Deer stated the total cost of the project excluding
contributions, was $4.122 million lower than forecast. Red Deer explained that the Red Deer
City Council approved the original budget, which formed the basis of the 209S substation
proposal to provide services (PPS) estimate of $21.666 million. This estimate was reduced
to $20.979 million after removing AFUDC (allowance for funds used during construction)
from the customer contributions as directed by the Commission in Direction 3 of
Decision 3599-D01-2015. The actual project cost upon capitalization was $16.857 million,
resulting in a variance to the PPS estimate of $4.122 million.39 The $4.122 million variance was
due to the competitive bids being lower than anticipated.

82.    Red Deer indicated that including customer contributions, the 209S substation, which
was placed into service in 2016, was completed at a cost $5.024 million which was
$0.876 million lower than the forecast amount of $5.890 million. Red Deer provided the
following table:

Table 9.        209S substation 2016 capital addition 40

                                        Table 23a 209S substation capital expenditure
 USA Account            Red Deer Account                             Description          2016 Forecast        2016 Actual
                                                                                                      ($000)
         350                    450                    Land and RoW [right-of-way]             915                   864
         352                    452                    Structures and Improvements            1,772                5,213
         353          457.20, 457.60, 457.80           Substation Equipment                  13,055                7,827
     353.10                     458                    Communication/Tele control              143                     0
     354.00                    463.20                  Towers & Fixtures                      4,120                1,170
     356.00                    464.30                  Overhead Conductors & Devices           975                 1,783
 Subtotal                                              Total exclusive of Contributions      20,979               16,857
      111.1                                            Customer Contributions               -15,088               -11,833
 Total                                                 AESO Local Investment                  5,890                5,024
Source: Exhibit 23872-X0001, Table 23a, PDF page 52.

39
     Exhibit 23872-X0001, application, PDF page 17.
40
     Note that in response to Exhibit 23872-X0010, RD-AUC-2018OCT18-012(c), PDF page 74, Red Deer
     confirmed that the reference to Table 23(a) 209S Substation “capital expenditure” was in error and should have
     indicated “capital additions.”

16 • Decision 23872-D01-2019 (March 8, 2019)
2018-2020 Transmission Facility Owner General Tariff Application                                 The City of Red Deer

83.     In response to an IR, Red Deer provided explanations for the variances on a USA account
basis as follows: 41

               •    USA 350 Land and Right of Way - the final land acquisition costs and variance
                    for USA 350 was known and discussed at the time of Red Deer’s last GRA in IR
                    responses to RD-AUC-2015FEB05-019 and RD-AUC-2015Mar02-001, therefore
                    Red Deer considered the variance to remain within a reasonable range.

               •    USA 352 Structures and Improvements - Lower than forecast actual costs were
                    the result of switchyard buswork, structures, foundation and grounding costs in
                    the amount of $3,500,00[0], inadvertently being forecast under USA 353
                    (Substation Equipment) rather than USA 352.

               •    USA 353 Substation Equipment - In addition to the explanation provided for
                    USA 352; actual costs for USA 352 were lower than forecast due to the
                    competitive bidding process that resulted in a bid lower (leading to lower actual
                    costs) than expected at the time of the forecast. The competitive bidding process
                    savings were offset in the amount of $143,000 by Communication/SCADA
                    equipment for 209S Substation forecast within USA 353.1, but capitalized in
                    USA 353.

               •    USA 353.1 Communication/Tele Control - As discussed under USA 353 above,
                    System Communication and Control equipment related to
                    Communication/SCADA equipment in 209S substation in the amount of
                    $143,000 was forecast within USA 353.1, but was included and capitalized in
                    USA 353. This resulted in no capital additions for USA 353.1 on an actual basis.

               •    USA 354 Towers and Fixtures and USA 356 Overhead Conductors & Devices -
                    When examining the variances in each account individually, labour costs that had
                    been forecast under USA 354 were incurred on an actual basis in USA 356.
                    However, on a total basis for these two accounts, actual costs were lower than
                    forecast due to the competitive bidding process that resulted in a bid lower
                    (leading to lower actual costs) than expected at the time of the forecast.

84.     Red Deer clarified that the cost changes captured in Table 23(a) were not included in the
final PPS prior to the awarding of the contract and commencement of construction. 42 The CCA
questioned Red Deer, asking that if it does not prepare a “realistic budget by component prior to
commencement of construction, what yardstick would it then use for cost monitoring, control
and reporting purposes?” Red Deer responded that the project had been forecast at a ±30 per cent
level of accuracy, but the final costs were within 4 per cent of that forecast. Red Deer submitted
that “this outcome is enough evidence that prove [sic] the budget was indeed ‘realistic.’” 43

85.     The CCA argued that it was not entirely clear what Red Deer meant when it stated that
the final cost was within four per cent of forecast. Although the overall variance was a cost
saving for the 209S substation, the CCA argued that poor budgeting and monitoring practices
during the execution phase could equally have resulted in cost overruns. Red Deer’s explanation
that the actual cost was lower because of a “bid lower than expected at the time of the forecast”

41
     Exhibit 23872-X0010, RD-AUC-2018OCT18-012(d), PDF pages 74-75.
42
     Exhibit 23872-X0013, RD-CCA2018OCT18-003(b), PDF page 7.
43
     Exhibit 23872-X0013, RD-CCA2018OCT18-003(c), PDF page 7.

                                                                         Decision 23872-D01-2019 (March 8, 2019) • 17
2018-2020 Transmission Facility Owner General Tariff Application                           The City of Red Deer

says nothing about the particular risk events that caused the budget to be significantly higher
than actual costs.

86.     In response to Direction 9, Red Deer stated that the CCA’s recommendations in
paragraphs 115 of Decision 3599-D01-2019 were not introduced at the evidentiary stage of
Proceeding 3599 and consequently, the CCA’s recommendations were not tailored to Red Deer’s
circumstances and therefore, were not always applicable. Red Deer clarified in Proceeding 3599
that the project was tendered as a design-and-build, fixed-price turnkey contract with a restriction
on change orders and related cost increases. The implication therefore, was that the vendor is
responsible for day-to-day decision making and the vendor accepts the risks of those decisions. 44

87.   Red Deer further explained that in order to ensure the vendor stayed at its tendered price,
Red Deer:

          … upheld good project management practices (or risk mitigation strategies) such as
          requiring of the vendor daily work reports, Engineering Data Requests, Requests for
          Information, action logs, monthly progress reports, project performance reviews, and
          energization checklists to keep costs managed and contained.

          As well, RD retained a 10% hold-back until substantial completion and held a
          performance bond equal to 50% of contract value to help mitigate any insolvency risk. 45

88.     The CCA submitted that line-item variances, such as those reflected in Table 23(a), are
reflective of management’s ability to use budgets as a tool for cost and scheduling control and
remains an appropriate tool to assess the level of variances in relation to Red Deer’s scale of
operations. The CCA also submitted that it is appropriate to assess variances in relation to major
risk elements because “variances arise as a result of the realization of unmitigated risks.” 46 The
CCA argued that any accountability measures such as the identification of variances by risk
element referred to in the CCA’s argument should be considered relevant and necessary tools to
help Red Deer manage and control costs for capital projects.

89.     The CCA also noted that the larger TFOs have been directed to maintain a risk register
for capital projects that includes identification and tracking of project risks. If project risk
variances are not reported having regard to risk elements, the purpose of a risk register as an
accountability tool would be nullified.

90.    The CCA argued that Red Deer did not identify the costs variances on the basis of risk
events as required by Direction 9 of Decision 3590-D01-2015. 47

91.     The CCA submitted that initial PPS estimates prepared for the purposes of AESO review,
while useful, are subject to a wide margin of cost variance due to their early stage of
development. However, the PPS update prepared just prior to commencement of construction
should have reflected the most current and realistic estimate of costs. Red Deer did not update its
project budget prior to commencement of construction and there were classification errors,
which seem to have exacerbated the differences between forecast and actual costs at the account
level. The CCA submitted that irrespective of whether the final PPS was prepared before the

44
     Exhibit 23872-X0001, PDF page 17.
45
     Exhibit 23872-X0001, PDF page 17.
46
     Exhibit 23872-X0018, CCA reply argument, paragraph 6.
47
     Exhibit 23872-X0016, CCA argument, paragraphs 31-37.

18 • Decision 23872-D01-2019 (March 8, 2019)
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