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Decision 24188-D02-2020

ATCO Gas and Pipelines Ltd. 2018 Depreciation Application February 20, 2020

Alberta Utilities Commission

Decision 24188-D02-2020

ATCO Gas and Pipelines Ltd.

2018 Depreciation Application

Proceeding 24188

February 20, 2020

Published by the:


Eau Claire Tower

1400, 600 Third Avenue S.W.

Calgary, Alberta T2P 0G5

Telephone: 310-4AUC (310-4282 in Alberta)

1-833-511-4AUC (1-833-511-4282 outside Alberta)

Email: [email protected]

Website: www.auc.ab.ca

The Commission may, within 30 days of the date of this decision and without notice, correct

typographical, spelling and calculation errors and other similar types of errors and post the

corrected decision on its website.

Decision 24188-D02-2020 (February 20, 2020) i

Contents

1 Decision summary ................................................................................................................ 1

2 Background and procedural summary .............................................................................. 2 2.1 Rider S .......................................................................................................................... 3 2.2 Commission-initiated review and variance ................................................................... 3

3 ATCO Gas’s depreciation study ......................................................................................... 3

4 Depreciation parameters ..................................................................................................... 6 4.1 Accounts for which no issues were raised by interveners ............................................ 6

4.1.1 Accounts for which no changes were proposed ................................................ 7

4.1.2 Accounts for which changes were proposed ..................................................... 7 4.1.2.1 Amortization of contributions by ATCO Gas to transmission service

providers ............................................................................................ 7 4.1.3 Move to amortization accounting for certain accounts ..................................... 8

4.2 Accounts for which changes were proposed and issues were raised by interveners .... 9

4.2.1 Accounts for which amortization was proposed and issues were raised .......... 9 4.2.2 Account for which issues were raised involving service life and/or life-curve

adjustments ..................................................................................................... 11 4.2.3 Accounts for which issues were raised involving net salvage ........................ 13

4.2.3.1 Gradualism ......................................................................................... 13

4.2.3.2 Alternative accounting approaches .................................................... 14 4.2.3.3 Accounts 472 (Structures and Improvements) and 474 (Regulator and

Meter Stations) ................................................................................. 15 4.2.3.4 Account 473 Services ........................................................................ 17

4.2.3.5 Account 475 Mains ............................................................................ 18

5 ATCO Gas response to Direction 51 ................................................................................ 20

6 Rate shock ........................................................................................................................... 22

7 Order ................................................................................................................................... 23

Appendix 1 – Proceeding participants ...................................................................................... 25

Appendix 2 – Summary of Commission directions .................................................................. 26

List of tables

Depreciation parameters and rates ........................................................................... 5

Move to amortization accounting proposed ............................................................. 9

Account 474 Regulators and Meter Installations ................................................... 16

Account 473 Services ................................................................................................ 18

Decision 24188-D02-2020 (February 20, 2020) ii

Account 475 Mains .................................................................................................... 19

Mains account segregation by Canadian distribution utilities ............................. 21

Decision 24188-D02-2020 (February 20, 2020) 1


Calgary, Alberta

ATCO Gas and Pipelines Ltd. Decision 24188-D02-2020

2018 Depreciation Application Proceeding 24188

1 Decision summary

1. This decision provides the determinations of the Alberta Utilities Commission with

respect to ATCO Gas and Pipelines Ltd.’s (ATCO Gas) 2018 depreciation application, which

was supported by a depreciation study prepared by Mr. Larry Kennedy of Concentric Advisors,

ULC (Concentric). For the reasons set out in this decision, the Commission has determined that

the service lives, Iowa life-curves (life-curves) and estimated net salvage percentages as

proposed by ATCO Gas for its depreciation study accounts are reasonable, except for

Account 475 Mains, where the proposed change for net salvage from negative 60 per cent to

negative 70 per cent is denied.

2. At the time of its next depreciation study, ATCO Gas is directed to review and report on

alternatives to the traditional approach to net salvage for any account for which ATCO Gas has

proposed net salvage rates that are more negative than negative 60 per cent, or for which the

mean net salvage percentage for the peer utility comparator group for ATCO Gas is more than

25 per cent different from the net salvage rate proposed by ATCO Gas. For all alternatives

considered, ATCO Gas should explain in detail why the alternative was either adopted or

rejected.

3. ATCO Gas is directed to include revised schedules of depreciation parameters and rates

resulting from this decision in its 2021 annual performance-based regulation (PBR) rate

adjustment filing. The schedules also are to include updated schedules for determining net annual

depreciation expense and amortization of reserve differences.

4. ATCO Gas is directed to incorporate the depreciation rates reflective of the findings,

conclusions and directions in this decision in its 2021 annual PBR rate adjustment filing,

including recovery of the remaining depreciation expense shortfall. Rider S will remain for the

purposes of collecting a portion of the shortfall in depreciation expense until its expiry on

December 31, 2020.

5. For the reasons set out in this decision, the Commission finds that ATCO Gas has

complied with Direction 51 from Decision 2011-450.1 The segregation of Account 475 Mains

into separate accounts for steel or plastic pipe will not be required at this time.

1 Decision 2011-450: ATCO Gas (A Division of ATCO Gas and Pipelines Ltd.), 2011-2012 General Rate

Application Phase 1, December 5, 2011.

2018 Depreciation Application ATCO Gas and Pipelines Ltd.


2 Background and procedural summary

6. In Decision 20414-D01-2016 (Errata),2 the Commission set out parameters for the 2018-

2022 PBR plans for the six distribution utilities: ATCO Electric Ltd., FortisAlberta Inc., AltaGas

Utilities Inc., ATCO Gas (distribution), ENMAX Power Corporation (distribution), and EPCOR

Distribution & Transmission Inc. (distribution).

7. In that decision, the Commission also established a rebasing approach to transition the

distribution utilities from the then-current PBR plans to the 2018-2022 PBR framework by

setting the going-in rates on the basis of a notional 2017 revenue requirement. Additionally, the

Commission permitted the distribution utilities to file separate depreciation-related applications

in 2018 and stated that going-in rates would be adjusted effective January 1, 2018, on a

prospective basis to reflect any resulting changes in approved depreciation parameters,3 and that

the distribution utilities also would be required to submit a base K-bar adjustment to update the

interim base K-bar using the updated going-in-rates and the updated depreciation rates.4

8. On December 21, 2018, ATCO Gas filed an application with the Commission requesting

approval of its proposed depreciation parameters to be effective January 1, 2018. 5 Specifically,

ATCO Gas requested approval of:

• Updated depreciation parameters as supported by the depreciation study conducted by

Concentric; and

• Interim approval of a change in net depreciation expense of $24.2 million to be

collected as a Rider S effective March 1 to December 31, 2019. The amount to be

collected was subsequently corrected to $21.3 million.6

9. The Commission issued a notice of application on January 3, 2019, and requested that

interested parties file a statement of intent to participate (SIP) by January 17, 2019.7 The

Commission received SIPs from the Office of the Utilities Consumer Advocate (UCA), the

Consumers’ Coalition of Alberta (CCA) and The City of Calgary.8

10. The process schedule was subsequently amended to reflect a UCA extension request

associated with the hiring of a depreciation expert, two rounds of information requests (IRs),

with a third round of IRs exclusively for Calgary. The proceeding also dealt with a motion from

Calgary to compel full and adequate responses from ATCO Gas to IRs; a motion from ATCO

Gas to strike Calgary’s evidence; intervener evidence filed on behalf of the UCA, the CCA and

Calgary; and rebuttal evidence from ATCO Gas. Written argument and reply argument followed.

11. The Commission considers the record for this proceeding to have closed on

November 22, 2019, with the filing of reply argument.

2 Decision 20414-D01-2016 (Errata): 2018-2022 Performance-Based Regulation Plans for Alberta Electric and

Gas Distribution Utilities, Proceeding 20414, February 6, 2017. 3 Decision 20414-D01-2016 (Errata), paragraph 70. 4 Decision 20414-D01-2016 (Errata), paragraph 253. 5 Exhibit 24188-X0001.01,application, paragraph 4. 6 Exhibit 24188-X0019, ATCO-AUC2019FEB05-002(c). 7 Exhibit 24188-X0005, Notice of application, January 3, 2019. 8 Exhibits 24188-X0006, 24188-X0007 and 24188-X0008, statements of intent to participate.



12. In reaching the determinations set out within this decision, the Commission has

considered all relevant materials comprising the record of this proceeding. Accordingly,

references in this decision to specific parts of the record are intended to assist the reader in

understanding the Commission’s reasoning relating to a particular matter and should not be taken

as an indication that the Commission did not consider all relevant portions of the record with

respect to the matter.

2.1 Rider S

13. For the reasons detailed in Decision 24188-D01-2019,9 the Commission approved a

Rider S that recovers 25 per cent of ATCO Gas’s applied-for 2018 and 2019 depreciation

expense shortfall, on a placeholder basis, effective August 1, 2019, to December 31, 2019, as

well as a subsequent Rider S that recovers 25 per cent of the estimated depreciation expense

shortfall for the year 2020 on a placeholder basis, effective January 1, 2020, to December 31,

2020.



including recovery of the remaining depreciation expense shortfall. Rider S will remain for the

purposes of collecting a portion of the shortfall in depreciation expense until its expiry on

December 31, 2020.

2.2 Commission-initiated review and variance

15. On May 29, 2019, the Commission initiated a review and variance (R&V) proceeding,

Proceeding 24609, to consider the method of accounting for new depreciation parameters and

expense in rates under the 2018-2022 PBR term set out in Decision 20414-D01-2016 (Errata)

and Decision 22394-D01-2018.10 11 Direction concerning the method for proposed changes to

approved depreciation parameters was contingent on the Commission rendering a decision for

Proceeding 24609. On January 14, 2020, the Commission issued Decision 24609-D01-2020.12

The changes to depreciation parameters approved in this decision are approved on a final basis,

to be reflected in rates in accordance with the directions in Decision 24609-D01-2020.

3 ATCO Gas’s depreciation study

16. Prior to the current application, ATCO Gas’s last depreciation study was completed in

2010, and an update to depreciation parameters and related depreciation expense was approved

in Decision 2011-45013 as part of ATCO Gas’s 2011-2012 general rate application (GRA).

9 Decision 24188-D01-2019: ATCO Gas, a division of ATCO Gas and Pipelines Ltd., 2019 Rider S,

Proceeding 24188, July 25, 2019. 10 Proceeding 24609, Commission-initiated review of Decision 20414-D01-2016 (Errata) and Decision 22394-

D01-2018, limited to the method of accounting for new depreciation parameters and expense in rates under the

2018-2022 performance-based regulation plan. 11 Decision 22394-D01-2018: Rebasing for the 2018-2022 PBR Plans for Alberta Electric and Gas Distribution

Utilities, First Compliance Proceeding, Proceeding 22394, February 5, 2018. 12 Decision 24609-D01-2020: Commission-Initiated Review of Decision 20414-D01-2016 (Errata) and Decision

22394-D01-2018 Limited to the Method of Accounting for New Depreciation Parameters and Expense in Rates

under the 2018-2022 Performance-Based Regulation Plan, January 14, 2020. 13 Decision 2011-450: ATCO Gas (A Division of ATCO Gas and Pipelines Ltd.) 2011-2012 General Rate

Application Phase 1, Proceeding 969, Application 1606822, December 5, 2011.



The 2018 depreciation study, prepared by Concentric for ATCO Gas, is based on ATCO Gas’s

plant in service as of December 31, 2017 (the depreciation study), and was attached as

Appendix A to ATCO Gas’s application.14

17. The depreciation parameters with respect to service life, life-curve and net salvage

estimates recommended by Concentric were developed based on the straight-line method using

the equal life grouping procedure, and were applied on a whole life basis. The calculations were

based on attained ages and estimated average service life and forecast net salvage characteristics

for each depreciable group of assets. Variances between the calculated accrued depreciation and

the book accumulated depreciation, as of December 31, 2017, were amortized over the

composite remaining life of each account.15 ATCO Gas and Mr. Kennedy confirmed that these

methodologies are consistent with those used by ATCO Gas and Mr. Kennedy in previous

depreciation studies.16

18. Mr. Kennedy conducted the depreciation study based on a traditional retirement rate

analysis and a net salvage study. The service life estimates used in the depreciation and

amortization calculations were based on professional judgment, a review of management’s plans,

a general knowledge of the natural gas distribution industry, and comparisons of the service life

estimates from studies performed by Concentric for other natural gas distribution companies.17

19. ATCO Gas noted in its application that the net increase in depreciation expense, as a

result of the applied-for changes to depreciation parameters, was $24.2 million, as compared to

depreciation parameters approved in the 2011-2012 GRA. The depreciation expense increase

was mainly attributed to increased expense related to net salvage for service lines, mains, and

regulator and meter installations, as well as the effect of the amortization of reserve differences

for these assets.18

20. The increase in depreciation expense was calculated in two parts. First, the changes in

depreciation parameters resulting in an increase in net depreciation expense of $12.3 million.

The calculation of the depreciation expense was shown in Appendix B of the application.19

Second, the change in the amortization of reserve differences increased net depreciation expense

by $11.9 million. The calculation of the resulting depreciation expense true-up was shown in

Appendix A of the application.20

21. In responding to an IR, ATCO Gas discovered that it had inadvertently misstated, in its

application, that the depreciation study would lead to a net increase to depreciation expense of

$24.2 million. ATCO Gas corrected the error revising the estimated increase to depreciation

expense to $21.3 million. ATCO Gas provided revised bill impact assessments and rate

schedules for ATCO Gas North and ATCO Gas South.21 No further revision to the application

was provided by ATCO Gas.

14 Exhibit 24188-X0001.01, application, Appendix A-Concentric ATCO Gas 2018 Depreciation Study. 15 Exhibit 24188-X0001.01, application, Appendix A-Concentric ATCO Gas 2018 Depreciation Study, page 3-2. 16 Exhibit 24188-X0001.01, application, Appendix A-Concentric ATCO Gas 2018 Depreciation Study, page 1-1. 17 Exhibit 24188-X0001.01, application, Appendix A-Concentric ATCO Gas 2018 Depreciation Study, page 3-5. 18 Exhibit 24188-X0001.01, application, paragraph 8. 19 Exhibit 24188-X0001.01, application, Appendix B, schedules 2 and 3. 20 Exhibit 24188-X0001.01, application, Appendix A, Section 5.2, tables 2a, 2b and 2c. 21 Exhibit 24188-X0024, ATCO-AUC-2019FEB05-002(a), Attachment 1, and Exhibit 24188-X0025, ATCO-

AUC-2019FEB05-002(a), Attachment 2.1



22. ATCO Gas proposed service life and/or life-curve adjustments, as well as net salvage

percentage adjustments, for most of its depreciation study accounts. The asset accounts for 2018

studied by Concentric showing the previously approved and the applied-for proposed service

life, life-curve and net salvage adjustments are set out in Table 1 below. As discussed in

Section 4.2.3.1, ATCO Gas indicated that its application applied gradualism and moderation to

net salvage values for four accounts.

Depreciation parameters and rates

Previously approved Proposed for 2018

Account Description Life-curve Net

salvage (%)

Depreciation rate (%)

Life-curve Net

salvage (%)


Accounts for which no issues were raised

Accounts for which no changes were proposed

471.01 Land rights (railway) 20-SQ 0 5.00 20-SQ 0 5.01

487.00 Equipment on customer sites 20-R5 0 5.10 20-R5 0 4.92

Accounts for which changes were proposed

474.01 Regulator and meter installations-electronic (high-use)

15-R2 -10 6.13 12-R3 -20 10.47

474.02 Regulator and meter installations-electronic (low/mid-use)

18-R2 0 7.82 15-R2 0 7.14

477.00 Measuring and regulating equipment

40-R2.5 -40 3.82 45-R1.5 -30 3.55

477.01 Measuring and regulating equipment-electronic

17-R3 0 5.59 17-R3 -10 6.90

478.00 Meter equipment 20-R0.5 0 5.08 18-R3 10 4.79

478.01 Meters-electronic equipment 15-R2 0 7.05 12-R3 20 6.49

478.02 Automated meter reading-devices

18-R2 0 7.44 15-R2 0 7.31

482.00 Structures and improvements

40-R2 0 2.99 44-R2.5 -15 2.87

482.01 Structures and improvements-other

10-R2.5 0 10.00 10-R2.5 -7 8.43

483.00 Office furniture & equipment 20-SQ 2 4.90 20-SQ 0 5.00

484.00 Office equipment 11-R2 25 7.08 12-L2.5 15 6.86

484.01 Transportation equipment-NGV

9-R1 0 10.31 12-R1.5 0 7.12

485.00 Heavy work equipment 10-L2.5 30 7.03 13-L2 20 6.03

486.00 Tools and work equipment 15-SQ 10 4.66 15-SQ 0 6.67

488.00 Communication structures & equipment

20-S0.5 0 5.36 23-R1 -3 4.54

488.01 Communication equipment-mobile

15-R5 0 6.25 17-R4 -5 6.30

489.00 Stores, Shop & Garage equipment

15-SQ 10 3.56 15-SQ 1 6.60

490.01 Natural gas vehicle refueling equipment

22-R2.5 0 4.31 24-R3 -4 4.52

491.00 Laboratory equipment 20-SQ 0 5.00 15-SQ 0 6.67



Previously approved Proposed for 2018

Account Description Life-curve Net

salvage (%)


Life-curve Net

salvage (%)


Move to amortization accounting for certain accounts

471.00 Land Rights 100-R5 0 1.02 75-SQ 0 1.33

495.00 Leaseholds NA 9-SQ 0 11.11

496.00 Specialized computer & electronic office equipment

10-R4 0 9.04 6-SQ 0 16.67

Accounts for which changes were proposed and issues were raised

Accounts for which amortization was proposed

499.00 Software-Desktop NA 3-SQ 0 33.33

499.01 Software-Minor NA 7-SQ 0 14.29

499.02 Software-Major NA 10-SQ 0 10.00

Accounts involving service life and/or life-curve adjustments

473.00 Services 57-R2.5 -100 4.08 57-R2.5 -125 4.53

Accounts involving net salvage

472.00 Structures and Improvements

55-R3 -40 2.74 60-R3 -65 3.07

474.00 Regulator and meter installations

51-R3 -30 2.80 47-R4 -60 3.55

473.00 Services 57-R2.5 -100 4.08 57-R2.5 -125 4.53

475.00 Mains 66-R2.5 -60 2.78 66-R2.5 -70 3.00

Source: Exhibit 24188-X0002, application, Appendix B, Schedule 1.

4 Depreciation parameters

23. No issues were raised by the interveners with respect to the proposed depreciation

parameters for a number of accounts. Particulars regarding the accounts for which no issues were

raised are set out in Section 4.1. Particulars regarding the accounts and other matters for which

issues were raised are set out in Section 4.2.

24. The previously approved and the proposed depreciation parameters for the asset accounts

within each of these categories are set out in Table 1.

4.1 Accounts for which no issues were raised by interveners

25. The asset accounts in respect of which no issues were raised by interveners fall generally

into three categories, each of which are addressed in the following sections:

(a) Accounts for which no changes were proposed (Section 4.1.1);

(b) Accounts for which changes were proposed (Section 4.1.2); and

(c) Move to amortization accounting for certain accounts (Section 4.1.3).



4.1.1 Accounts for which no changes were proposed

26. ATCO Gas did not propose any changes to the depreciation parameters for

Account 471.01 Land Rights (Railway), and Account 487.00 Equipment on Customer Sites.

Commission findings

27. The Commission is satisfied based on the evidence on the record of this proceeding that a

departure from the previously approved service life, life-curve and net salvage rates for

Account 471.01 Land Rights (Railway) and Account 487.00 Equipment on Customer Sites, is

not required. The Commission accepts ATCO Gas’s continued use of the previously approved

service life, life-curve and net salvage rates for these accounts.

4.1.2 Accounts for which changes were proposed

28. ATCO Gas proposed service life, life-curve and/or net salvage adjustments for the

following accounts as shown in Table 1 above:

• 474.01 Regulator and meter installations-electronic (high-use)

• 474.01 Regulator and meter installations-electronic (low, mid-use)

• 477.00 Measuring and regulating equipment

• 477.01 Measuring and regulating equipment-electronic

• 478.00 Meter equipment

• 478.01 Meters-electronic equipment

• 478.02 Meters-automated meter reading devices

• 482.00 Structures and improvements

• 482.01 Structures and improvements-other

• 483.00 Office furniture and equipment

• 484.00 Office equipment

• 484.01 Transportation equipment-NGV

• 485.00 Heavy work equipment

• 486.00 Tools and work equipment

• 488.00 Communication structures and equipment

• 488.01 Communication equipment-mobile

• 489.00 Stores, shop and garage equipment

• 490.01 Natural gas vehicle refuelling equipment

• 491.00 Laboratory equipment

Commission findings

29. The Commission is satisfied based on the evidence on the record of this proceeding that

the proposed changes to the previously approved service life, life-curve and/or net salvage rates

for each of these accounts are reasonable and, accordingly, approves ATCO Gas’s proposed

depreciation parameters for these accounts.

4.1.2.1 Amortization of contributions by ATCO Gas to transmission service providers

30. In its application, ATCO Gas requested approval to use amortization accounting for

contributions made to transmission service providers including ATCO Gas and Pipelines Ltd.

and NGTL as described below:



Similarly, ATCO Gas proposes using amortization accounting for contributions made by

ATCO Gas to transmission service providers such as ATCO Pipelines. ATCO Gas has no

investment in this account for the depreciation study period, but requires the ability to

amortize these assets in future periods. ATCO Gas proposes to amortize these

contributions over an average service life equal to that used for similar assets built by

ATCO Pipelines for ATCO Gas customers. This is because the physical asset and their

retirements will not be tracked by ATCO Gas. The proposed treatment facilitates

administrative efficiency while aligning the recovery of the original capital cost over the

expected useful life of the assets.22

31. In response to a Commission IR on this subject, 23 ATCO Gas indicated that it did not

have any investment in this account for the depreciation study period but was requesting

approval to amortize this type of investment in the future. No intervener commented on the

proposal.

Commission findings

32. The Commission considers ATCO Gas’s proposal to amortize contributions over an

average service life equal to that used for similar assets built by ATCO Pipelines to be

reasonable in the circumstances, based on ATCO Gas’s evidence that this will contribute to

administrative efficiency while aligning the recovery of the original capital cost over the useful

life of the assets. The Commission considers that this approval can be revisited at the time of

ATCO Gas’s next depreciation study, once ATCO Gas has recorded investment in the account,

to ensure that ATCO Gas’s proposal to use amortization accounting for contributions made to

transmission service providers remains reasonable.

33. The Commission approves ATCO Gas’s proposal as filed. The Commission notes that

very little information was provided in respect of these contributions. However, ATCO Gas

indicated it had not recorded any investment during the depreciation study period. In approving

the amortization of any such future contributions, the Commission is not approving at this time,

the prudence of the contributions or the reasonableness of any amount.

4.1.3 Move to amortization accounting for certain accounts

34. As indicated in Table 2, ATCO Gas proposed to change the capital recovery

methodology for certain accounts from the standard form of depreciation to capital recovery

through amortization accounting.24 In the case of Account 471, a 100-R5 curve and for

Account 496, a 10-R4 curve was previously approved. Account 495 previously had a

depreciation rate of zero. ATCO Gas explained that these accounts are composed of numerous

units of property with relatively small value and Concentric’s recommendation removes the

disproportionate amount of effort required to track and retire the associated accounts.25 No issues

were raised by interveners with regard to the proposed change for these accounts.

35. For Account 471, Concentric opined that an appropriate service life for Distribution Land

Rights should be at least equal to the longest distribution life account. ATCO Pipelines has an

83-year average service life approved for the land rights account. It is expected that the land

rights for ATCO Gas will be shorter than for ATCO Pipelines as ATCO Gas does not maintain

22 Exhibit 24188-X0001.01, application, paragraph 14(b). 23 Exhibit 24188-X0040, ATCO-AUC-2019FEB25-009. 24 Exhibit 24188-X0001.01, application, Appendix A, Section 4.2, page 4-3. 25 Exhibit 24188-X0001.01, application, paragraph 14(b).



ownership of the right of way after the pipeline is retired. Concentric recommended an Iowa

75-SQ curve for this account based on the indications from ATCO Gas management and

operations and the professional judgment of Concentric.26

36. For accounts 495 and 496, Concentric stated that the amortization period was determined

based on professional judgement, which incorporated consideration of the period during which

the assets will render most of their service, the amortization period and service lives used by

other utilities, and the service life estimates used previously under depreciation accounting.27

Move to amortization accounting proposed

Account Title Amortization period, years

471 Land Rights 75

495 Leaseholds 9

496 Specialized Computer and Electronic Office Equipment 6

Commission findings

37. The Commission finds that amortization accounting is reasonable for the accounts listed

in Table 2, given the administrative benefits of applying an SQ curve methodology for the

accounts proposed by ATCO Gas. In light of the above, the Commission approves the use of

amortization accounting and the corresponding amortization periods for the accounts specified in

Table 2 above.

4.2 Accounts for which changes were proposed and issues were raised by

interveners

4.2.1 Accounts for which amortization was proposed and issues were raised

38. In addition to those listed in Table 2, ATCO Gas proposed amortization accounting for

several other accounts, which was opposed, in part, by the interveners. For accounts 499.00

(Software Desktop), 499.01 (Software Minor), and 499.02 (Software Major), Mr. Bowman,28 on

behalf of the UCA, agreed that the use of amortization for software is a practical proposal that

should be accepted by the Commission. However, Mr. Bowman took issue with the proposed

amortization periods of three, seven and 10 years for the three accounts, respectively, and urged

the Commission to reject them. Mr. Bowman suggested that the proposed amortization periods

for the software packages are too short compared to their expected and known periods of use and

instead should be based on historical retirement experience. If amortized over too short a period,

excessive annual depreciation expense is recorded and a large reserve deficit is created.

Mr. Bowman said the effect was material and the life assumptions underlying the proposal were

entirely unsupported on the record of the proceeding. Mr. Bowman suggested that appropriate

amortization periods should be established in a compliance process, based on ATCO Gas filing

a detailed ledger of software vintages that remain in use.

39. Calgary supported the use of amortization accounting and Mr. Bowman’s proposal with

respect to the amortization periods for accounts 499.00, 499.01, and 499.02.29

26 Exhibit 24188-X0001.01, application, Appendix A, pages 3-4 and 3-5. 27 Exhibit 24188-X0001.01, application, Appendix A, page 4-3. 28 Exhibit 24188-X0087, UCA evidence, page 8. 29 Exhibit 24188-X0125, Calgary argument, paragraph 32.



40. In rebuttal evidence,30 ATCO Gas noted that the proposed amortization periods and

software groupings are the same as those approved by the Commission for ATCO Electric

(Transmission), ATCO Pipelines, and ATCO Electric (distribution). ATCO Gas explained that

due to the nature of software and its constant state of renewal, an estimate of cost to retire is not

practical for software assets. Software assets are retired only when the entire application is

decommissioned and/or replaced by a new application. As such, historical retirement experience

cannot be relied upon to determine amortization periods.

Commission findings

41. The Commission accepts the uncontested view in the circumstances of this proceeding

that the use of amortization accounting is a practical manner in which to determine annual

depreciation expense for the software accounts 499.00 (Software Desktop), 499.01 (Software

Minor), and 499.02 (Software Major) of ATCO Gas. Accordingly, the Commission finds it

reasonable to apply amortization accounting to ATCO Gas’s software accounts 499.00 (Software

Desktop), 499.01 (Software Minor), and 499.02 (Software Major) in this case.

42. With respect to the proposed amortization periods for these software accounts, the

Commission observes that the UCA did not pursue this issue or provide any recommendation

with respect to the appropriate amortization periods for these accounts in its argument. Nor did

the UCA suggest that the Commission should adopt amortization periods for these software

accounts different from those approved for the same or similar accounts for ATCO Electric Ltd.

(transmission), ATCO Electric (distribution)31 and ATCO Pipelines.

43. In Decision 20272-D01-2016, the Commission approved amortization periods of 10,

seven and three years for similar ATCO Electric (transmission) software accounts. The

Commission subsequently approved the same amortization periods for the same or similar

accounts for ATCO Pipelines in Decision 22011-D01-201732 and for ATCO Electric

(distribution) in Decision 24195-D01-2019.33 In the absence of a basis justifying why these

accounts should be subject to different amortization periods for ATCO Gas, and in light of

ATCO Gas’s evidence in this proceeding that “There are no material differences amongst these

other utilities and their use of this software that would warrant different lives for the various tiers

of software,”34 the Commission accepts that the amortization periods proposed by ATCO Gas are

reasonable in this case.

44. In light of the above, the Commission approves the use of a 3-SQ life-curve for

Account 499.00 (Software Desktop), a 7-SQ life-curve for 499.01 (Software Minor), and a

10-SQ life-curve for Account 499.02 (Software Major) for ATCO Gas.

30 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, paragraphs 31-33. 31 The Commission notes that Decision 24195-D01-2019 was issued on August 27, 2019, which was after the

filing of Mr. Bowman’s evidence in this proceeding. However, argument and reply argument in this proceeding

were filed after the release of Decision 24195-D01-2019. 32 Decision 22011-D01-2017: ATCO Pipelines, 2017-2018 General Rate Application, Proceeding 22011,

August 29, 2017. 33 Decision 24195-D01-2019: ATCO Electric Ltd., 2018 Depreciation Application, Proceeding 24195, August 27,

2019. 34 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, paragraph 28.



4.2.2 Account for which issues were raised involving service life and/or life-curve

adjustments

45. Account 473 Services represents over 30 per cent of distribution plant in service. In its

application, ATCO Gas proposed to maintain the currently approved life-curve of 57-R2.5. In its

evidence, the UCA suggested a 59-R3 life-curve would be a better fit to the data.35 The UCA

explained, in examining the account data, that Concentric’s recommendation to retain a 57-R2.5

curve failed to recognize two important principles of curve fitting:

1) Exposures of less than one per cent (i.e. the very tail end of life statistics in an

account) are of limited value in assessing life characteristics. This type of data is

frequently considered to be of lower quality, or is truncated. [footnote removed]

2) Data points representing the 20-80 per cent surviving range are the most critical for

curve fitting. Very early retirements or very late retirements should not be allowed to

excessively skew the data set. [footnote removed]36

46. The UCA had a separate concern of data quality, noting that the data used by Concentric

was not the same as the data provided in response to a Commission IR.37 The UCA

recommended that Concentric apply a data quality process to its studies in future proceedings.

47. The UCA undertook an analysis of the ATCO Gas data that demonstrated the 58-R3

curve was a better fit for Account 473 than the 57-R2.5 curve proposed by ATCO Gas through

the most critical portion of the data available; i.e., the 58-R3 curve was a better fit for

Account 473 than the 57-R2.5 curve in the range of 80 per cent surviving. The UCA

recommended the use of the 59-R3 curve because of a slight lengthening of the average service

life of Account 473. The UCA explained that the data included premature meter retirements due

to the meter relocation replacement project (MRRP) recently undertaken by ATCO Gas.38

48. Concentric stated that Mr. Bowman’s evidence placed too much emphasis on minimizing

the weight attached to the portion of the curve below one per cent. Mr. Kennedy explained that it

is industry practice always to consider both the full curve and the adjusted curve before deciding

which data points to retain. Mr. Bowman recommended ignoring the observed life table at less

than one per cent while overemphasizing the 20-80 per cent surviving range. For this account,

there was only one data point that relates to exposures of more than one per cent of total

exposures and is also below the 80 per cent surviving line. Selection of an average service life

estimate for an account with over $1.4 billion on the basis of only one observed life table data

point is not appropriate and does not comply with depreciation practices or principles, according

to Mr. Kennedy.39

49. Concentric performed a residual measure calculation40 for both the 57-R2.5 and 59-R3

curves with the historical data points truncated at one per cent.41 This showed the residual

measure for the Iowa 57-R2.5 of 0.0873 and the residual measure for the Iowa 59-R3 being a

35 Exhibit 24188-X0087, UCA evidence, page 2. 36 Exhibit 24188-X0087, UCA evidence, page 6. 37 Exhibit 24188-X0022, ATCO-AUC-2019FEB05-001, Attachment 3. 38 Exhibit 24188-X0087, UCA evidence, page 7. 39 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, Appendix A, pages 7-8. 40 Residual measure is the difference between predicted values and actual values. A lower residual measure

indicates a better goodness of fit to the data. 41 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, Appendix A, pages 8-9.



worse statistical fit at 0.1218. With regard to the significance of the MRRP in early terminations,

Mr. Kennedy noted that the MRRP resulted in approximately $1.2 million of retirements in this

account, of which 94 per cent are related to vintage installations from 1949 through 1976. As

such, the retirements associated with the MRRP are not and should not be considered as

premature in the context of the overall account. The data quality issue identified by the UCA is

the result of an adjusted transaction year, which modifies the retirement at a specific age interval.

There was no data quality issue with the data used by Concentric as claimed by Mr. Bowman.

50. The UCA explained that it had not used a single data point, and that this claim by

Concentric was factually incorrect. The UCA evidence used all available data but highlighted the

data that was of lower quality. In argument, the UCA summarized its position on Account 473:

Note that 58-R3 is most notably a far better fit than 57-R2.5 through the most critical

portion of the data available, that in the range of 80% surviving, where both exposures

are above 1% and the critical 20 to 80 per cent range is reached. Further, although the

data is of much lower quality, the 58-R3 line also better tracks the portion of the

experienced data that is represented by the hollow boxes (less than 1% surviving).

[footnote omitted] 42

51. Calgary supported the UCA proposal for Account 473, and argued that the Commission

should reject ATCO Gas’s argument challenging Mr. Bowman’s evidence.43

Commission findings

52. The Commission finds insufficient evidentiary support for the UCA’s recommended use

of the 59-R3 curve. That recommendation was premised on:

• An analysis that, in the UCA’s view, demonstrates that the 58 R-3 curve is the best fit

(using a methodology that focuses on the 20-80 per cent surviving range as opposed to

the full curve).

• The UCA’s opinion that there should be a slight lengthening of the service life of

Account 473 to reflect the fact that the data for the account included premature meter

retirements due to the MRRP.

53. The Commission finds Concentric’s methodology to use a full curve to be supported

better than the UCA’s proposed methodology, which focuses on the 20-80 per cent surviving

range. Accordingly, the Commission is not satisfied that the 58 R-3 curve is the best fit. Further,

in light of Mr. Kennedy’s evidence that the MRRP resulted in approximately $1.2 million of

retirements in this account, of which 94 per cent are related to vintage installations from 1949

through 1976, the Commission does not accept the UCA’s assertion that these retirements were

premature. Consequently, the Commission also does not accept that there should be a

lengthening of the service life of Account 473 on that basis. The Commission also notes that the

residual analysis performed by Concentric indicated the 57-R2.5 was a superior statistical fit to

the data than the 59-R3 curve proposed by the UCA.

54. The Commission acknowledges the data quality issue raised by the UCA in relation to

Concentric’s study. However, the Commission accepts Mr. Kennedy’s explanation that adjusting

42 Exhibit 24188-X0131, UCA reply argument, paragraphs 11-12. 43 Exhibit 24188-X0132, Calgary reply argument, paragraph 16.



the transaction year was a necessary part of the depreciation analysis. On that basis, the

Commission is satisfied that there is no data quality issue associated with Concentric’s study in

relation to this account.

55. For all of the above reasons, the Commission approves the 57-R2.5 curve, as proposed by

ATCO Gas.

4.2.3 Accounts for which issues were raised involving net salvage

56. ATCO Gas utilized the traditional method of net salvage analysis which ATCO Gas

represented is the most commonly used approach to the estimation of net salvage requirements

by utilities across North America. Within this approach, an estimate of the future net salvage

costs is based on the remaining life in each account, based on the assumption that the costs of

removal will be charged to the accumulated depreciation account upon retirement.44

57. Both the UCA and the CCA objected to the continued use of the traditional method of

analyzing and calculating net salvage due to the increases in the proposed net salvage.45

4.2.3.1 Gradualism

58. For certain of ATCO Gas’s accounts, the net salvage percentages recommended in the

depreciation study include a significant reduction from what would have been recommended

based on an analysis of the data in order to introduce gradually the change in depreciation

parameters. This principle is known as gradualism. Concentric recommended that it was

necessary to maintain a reasonable matching between the consumption of the service value of the

assets and the depreciation expense component of the revenue requirement.

59. In rebuttal evidence, Mr. Kennedy noted that Concentric used the traditional net salvage

approach coupled with the use of gradualism and moderation as a form of rate mitigation. In

Concentric’s view, this approach avoids overreacting to the cost of removal increases over the

most recent period until such time as a future depreciation study is able to confirm any trend of

higher costs of removal.46

60. The following accounts include the concept of gradualism in the net salvage percentage

estimate, as proposed by ATCO Gas:

• Account 472.00 Distribution Plant - Structures and Improvements – The net salvage

percentage provided indications of the requirement of negative 100 per cent, however

with the use of the concept of gradualism a recommendation of negative 65 per cent

is recommended assuming the under-collected balance will be included in the next

depreciation study.

• Account 473.00 – Distribution Plant – Services - The net salvage percentage

provided indications of the requirement of negative 200 per cent, however with the

use of the concept of gradualism a recommendation of negative 125 per cent is

44 Exhibit 24188-X0043, ATCO-UCA-2019FEB25-006(e). 45 Exhibit 24188-X0085, CCA argument, Section 5.0, paragraph 44; Exhibit 24188-X0087, UCA evidence,

Section 3.0. 46 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, Appendix A, page 18.



recommended assuming the under-collected balance will be included in the next

depreciation study.

• Account 475.00 – Distribution Plant – Mains - The net salvage percentage provided

indications of the requirement of negative 100 per cent, however with the use of the

concept of gradualism a recommendation of negative 70 per cent is recommended

assuming the under-collected balance will be included in the next depreciation study.

• Account 482.00 General Plant - Structures and Improvements - The net salvage

percentage provided indications of the requirement of negative 30 per cent, however

with the use of the concept of gradualism a recommendation of negative 15 per cent

was recommended assuming the under-collected balance will be included in the next

depreciation study.47

61. The CCA supported gradualism but suggested that gradualism be employed using more

recent financial and accounting theory and practice rather than traditional methods. By doing so,

the CCA argued this results in a principled and defendable gradual approach rather than selecting

a number in the traditional manner, which has little or no empirical support to reduce rates, as

Concentric does.48

62. The UCA evidence did not address gradualism.49

Commission findings

63. The Commission agrees that the principles of gradualism and moderation are important

and should be included in the assessment of a depreciation study, especially in situations where a

large change in a depreciation parameter or parameters has been proposed. This issue is also

addressed in sections 4.2.3.3, 4.2.3.4 and 4.2.3.5 below that deal with four specific net salvage

accounts.

4.2.3.2 Alternative accounting approaches

64. In evidence, Mr. Bowman requested that for those accounts that exhibit proposed net

salvage values of negative 60 per cent or more negative, e.g., negative 70 or negative 100

(accounts 472, 473, 474, 475), the Commission direct ATCO Gas immediately to reduce the

costs of net salvage to a token level representing only an accrual for terminal retirements, and

begin rolling the costs of removal into the base capital cost of new assets for any interim

retirement.50 Alternatively, the Commission was requested to direct ATCO Gas to review, report

on and adopt alternatives to the traditional approach to net salvage either for any account where

net salvage rates were more negative than negative 60 per cent, or on a company-wide basis.51

No specific alternative methodologies were provided. Mr. Bowman considered any negative net

salvage rate more negative than negative 60 per cent to be atypical. As support for this view, he

offered a review of 307 capital accounts from other utilities where only 3.3 per cent of those

accounts had negative values that were more negative than negative 60 per cent.52 The CCA

47 Exhibit 24188-X0040, ATCO-AUC-2019FEB25-011(b). 48 Exhibit 24188-X0124, CCA argument, paragraphs 54-55. 49 Exhibit 24188-X0128.01, UCA argument, footnote 11. 50 Interim retirements are retirements of components of a major structure prior to the complete removal of the

retirement unit from service. Interim salvage is the salvage received from the disposition of the plant as a result

of interim retirements. Terminal retirements occur at the end of life of the asset. 51 Exhibit 24188-X0087, UCA evidence, page 3. 52 Exhibit 24188-X0113, UCA-AUC-2019SEP30-002(a) and (b).



agreed with and supported the UCA comments and made a recommendation stating, that “[w]ith

salvage costs forecast as much as 200 per cent of cost, there is an argument that as much or more

attention should be paid to the issue of salvage costs than the original costs of the asset. [footnote

omitted]”53 The CCA did not support a specific threshold but instead recommended standard

financial concepts be brought to bear on future liabilities.54

65. ATCO Gas responded that the traditional net salvage approach coupled with the use of

gradualism and moderation as a form of toll mitigation continues to be the accepted and proper

method to determine depreciation rates. This approach avoids overreacting to cost-of-removal

increases that have recently occurred until such time as future depreciation studies are able to

confirm the trend of higher costs of removal. The approach also ensures that today’s ratepayers

are not burdened with significant cost-of-removal increases.55

Commission findings

66. The Commission agrees that an examination of alternatives to the traditional method of

net salvage may be beneficial where there is a large gap between ATCO Gas’s net salvage rates

and those of its peers or where the traditional approach to net salvage may result in atypical

outcomes. The Commission considers that such an examination is better undertaken in

connection with the planning and preparation of a full depreciation study. Such an approach

would also provide interveners with the opportunity to consider the alternatives considered by

ATCO Gas and, potentially, to respond with additional alternative approaches. Accordingly, the

Commission directs ATCO Gas, in its next depreciation study, to review and report on

alternatives to the traditional approach to net salvage for any account in which ATCO Gas has

proposed net salvage rates that are more negative than negative 60 per cent, or for which the

mean net salvage percentage for the peer utility comparator group for ATCO Gas is more than

25 per cent different from the net salvage rate proposed by ATCO Gas. ATCO Gas should

explain in detail why the alternative was either adopted or rejected.

4.2.3.3 Accounts 472 (Structures and Improvements) and 474 (Regulator and Meter

Stations)

Account 472 Structures and Improvements

67. ATCO Gas requested a change in the net salvage rate for Account 472 Structures and

Improvements from negative 40 per cent to negative 65 per cent. Concentric explained that the

Account represents 0.97 per cent of the total depreciable plant studied. For the period 1995 to

2017, the net salvage ranged from zero per cent to negative 1,839 per cent, with an average value

of negative 176 per cent. The most recent three-year bands (2014-2016, and 2015-2017)

indicated negative 222 per cent and negative 135 per cent, respectively. ATCO Gas operations

and management indicated that the company expects net salvage activity to continue along the

current trend towards more negative percentages. The peer group of Canadian utilities utilized by

Concentric in its analysis ranged between negative 10 per cent and positive 20 per cent.56 Based

on historical indications, the comments from the operations and management staff, and the

indications from the peer comparison of Canadian utilities, Concentric stated that negative

53 Exhibit 24188-X0134, CCA reply argument, paragraph 18. 54 Exhibit 24188-X0117, CCA-AUC-2019OCT08-001(b). 55 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, Appendix A, page 18. 56 Exhibit 24188-X0045, ATCO-UCA-2019FEB25-005(c).



100 per cent net salvage would be appropriate. However, Concentric’s view was that a more

definitive and longer trend needs to be identified before a net salvage recommendation more

negative than negative 65 per cent is appropriate for this account.57

68. ATCO Gas explained that asbestos removal in Account 472 was only one of the drivers

for large negative net salvage values identified for Account 472. Historically, site remediation

and reclamation were not generally required when removing a station. The requirements for site

clean-up were increasing due to more stringent safety and site remediation requirements.58

Account 474 Regulator and Meter Installations

69. ATCO Gas requested a change in the net salvage rate for Account Regulator and Meter

Installations from negative 30 per cent to negative 60 per cent. Concentric explained that the

account represents 9.09 per cent of the total depreciable plant studied. For the period 1995 to

2017, the net salvage ranged from negative nine per cent to negative 327 per cent, with a

cumulative value of negative 112 per cent. The most recent three-year bands (2013-2015, 2014-

2016, and 2015-2017) indicate a range from negative 83 per cent to negative 51 per cent for the

most current three-year band. The most recent five-year band indicates negative 65 per cent.

Based on historical indications, the comments from the operations and management staff, and the

indications from the peer comparison of Canadian utilities, Concentric viewed that negative

60 per cent net salvage would be appropriate.59 ATCO Gas also provided the table below for

Account 474 .

Account 474 Regulators and Meter Installations

Year Retirements

($)

Cost-of-removal account

($)

Cost-of-removal percent

Gross salvage amount

($)

Gross salvage percent

Net salvage amount

($)

Net salvage percent

1995-2017 17,605,066 -19,869,823 -113 156,592 1 -19,713,231 -112

1995-2002 1,897,181 -621,618 -33 110,653 6 -510,965 -27

2003-2009 5,870,959 -10,509,328 -179 1 0 -10,509,327 -179

2010-2017 9,836,926 -8,738,877 -89 45,938 0 -8,692,939 -88

Exhibit 24188-X0040, ATCO-AUC2019FEB25-012, Table 3.

70. ATCO Gas explained that net salvage started to become more negative in 2003 when the

MRRP program was initiated.60

71. As noted in paragraph 64, accounts 472 and 474 were among those for which the UCA

recommended the Commission direct ATCO Gas immediately to reduce the costs of net salvage

to a “token level” representing only accrual for terminal retirements, and begin rolling the costs

of removal into the base capital cost of new assets for any interim retirement. Alternatively, the

Commission was requested to direct ATCO Gas to review, report on and adopt “alternatives” to

the traditional approach to net salvage for any account where net salvage rates were more

57 Exhibit 24188-X0001.01, application, Appendix A, pages 3-5 and 3-6. 58 Exhibit 24188-X0040, ATCO-AUC-2019FEB25-008(d). 59 Exhibit 24188-X0001.01, application, Appendix A, pages 3-7 and 3-8. 60 Exhibit 24188-X0040, ATCO-AUC-2019FEB25-012.



negative than negative 60 per cent. The UCA did not provide an alternative to the traditional

approach to net salvage for these two accounts.

Commission findings

72. ATCO Gas applied gradualism to arrive at the proposed net salvage value of negative

65 per cent value for Account 472. The Commission accepts the explanation of ATCO Gas that

environmental considerations are driving the trend towards more negative net salvage for this

account and considers the proposed net salvage rate of negative 65 per cent to be reasonable.

This net salvage value recognizes the current trend is less negative than all historical ranges

including the lowest three-year band at negative 135 per cent, and reasonably allows for a more

definitive trend to be established before a more negative salvage value than negative 65 per cent

would be appropriate for this account. The Commission, therefore, approves the net salvage

value for Account 472 as applied for by ATCO Gas.

73. ATCO Gas did not apply gradualism to Account 474 but rather, relied on historical

indications, the comments from the operations and management staff, and indications from the

peer comparison of Canadian utilities in support of the recommended change to a negative 60 per

cent net salvage for this account. Table 361 above, reflects a change for this account in net salvage

after 2003 and volatility in net salvage thereafter. The most recent bands indicate negative 88 per

cent for 2010-2017 and negative 179 per cent for 2003-2017. On the basis of the foregoing, the

Commission accepts that net salvage for Account 474 is becoming more negative than the

currently approved value of negative 30 per cent, and that the proposed value of negative 60 per

cent is reasonable. The Commission approves the net salvage value for Account 474 as applied

for by ATCO Gas.

4.2.3.4 Account 473 Services

74. ATCO Gas requested a change in the net salvage rate for Account 473 Services from

negative 100 per cent to negative 125 per cent. Concentric explained that the account represents

30.74 per cent of total depreciable plant studied. For the period 1995 to 2017, the net salvage

ranged from negative 143 per cent to negative 774 per cent with an average value of negative

383 per cent. The most recent three-year bands (2013-2015, 2014-2016 and 2015-2017) indicate

values of negative 466 per cent, negative 316 per cent and negative 269 per cent, respectively.

The most recent five-year band (2013-2017) indicated a negative net salvage rate of 347 per cent.

The peer group of Canadian utilities utilized by Concentric in its analysis ranged between

negative 22 per cent and negative 115 per cent. Based on historical indications and comments

from operations and management personnel, Concentric viewed that negative 200 per cent best

represented the net salvage expectation for the equipment in this account. However, Concentric

stated that a more definitive and longer term trend is required before a negative net salvage rate

more than negative 125 per cent is appropriate for this account. Concentric went on to state that

if the current net salvage trend continues, then a more negative net salvage recommendation may

be appropriate.62

75. ATCO Gas noted that for Account 473 Services, net salvage started to become more

negative in 2003 when MRRP was initiated and provided the following table for the account.

61 Exhibit 24188-X0040, ATCO-AUC2019FEB25-012, Table 3. 62 Exhibit 24188-X0001.01, application, Appendix A, pages 3-6 and 3-7.



Account 473 Services

Year Retirements

($)


($)

Cost-of-removal per cent


($)

Gross salvage per cent

Net salvage amount

($)

Net salvage per cent

1995-2017 34,134,194 -130,809,812 -383 34,768 0 -130,775,044 -383

1995-2002 4,295,558 -7,179,626 -167 7,079 0 -7,172,547 -167

2003-2009 7,578,305 -35,209,436 -465 123 0 -35,209,313 -465

2010-2017 22,260,331 -88,420,750 -397 27,566 0 -88,393,184 -397

Source: Exhibit 24188-X0040, ATCO-AUC2019FEB25-012, Table 2.

76. The UCA recommended retaining the negative 100 per cent for Account 473 as the

proposed salvage costs are outside the range of its peers and presented potential challenges to

regulatory oversight. The UCA explained that the scale of net salvage that ATCO Gas proposed

was very significant, for net salvage spending that has not yet occurred and that has not yet been

shown to be necessary or prudent.63

77. Calgary supported the UCA’s position that the negative net salvage rate of negative

100 per cent should be retained.64

78. Concentric responded that its recommendation of a salvage value of negative 125 per

cent was fully justified by the its depreciation study report.65

Commission findings

79. ATCO Gas applied gradualism to this account to arrive at the proposed salvage value of

negative 125 per cent. The Commission acknowledges the UCA’s recommendation to retain a

salvage value of negative 100 per cent for Account 473 as the proposed salvage costs are outside

the range of its peers. However, the Commission accepts that the net salvage percentage for this

account has demonstrated an increasing trend (becoming more negative) as compared to the

1995-2002 net salvage band and considers the proposed net salvage rate of negative 125 per cent

to be reasonable. This net salvage value recognizes the trend since 2002. Further, the historical

net salvage percentages for all ranges identified in Table 366 are more negative than negative

125 per cent, and the most recent five-year band (2013-2017) indicates a negative net salvage

rate of 347 per cent. In light of the foregoing and the significant historical volatility in net

salvage in this account, a net salvage value of negative 125 reasonably allows for a more

definitive trend to be established before a more negative salvage value than negative 125 per cent

would be appropriate for this account. Therefore, the Commission approves the net salvage value

of negative 125 per cent as applied for by ATCO Gas for Account 473.

4.2.3.5 Account 475 Mains

80. ATCO Gas requested a change in the net salvage rate for Account 475 Mains from

negative 60 per cent to negative 70 per cent. ATCO Gas has applied gradualism to arrive at the

negative 70 per cent. Concentric explained that this account represents 40.25 per cent of total

63 Exhibit 24188-X0087, UCA evidence, pages 12-13. 64 Exhibit 24188-X0125, Calgary argument, paragraph 32. 65 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, Appendix A, page 21. 66 Exhibit 24188-X0040, ATCO-AUC-2019FEB25-012, Table 2.



depreciable plant studied. For the period 1995 to 2017, the net salvage ranged from negative

38 per cent to negative 854 per cent with an average value of negative 112 per cent. The most

recent three-year bands (2013-2015, 2014-2016 and 2015-2017) indicate values of negative

94 per cent, negative 100 per cent and negative 82 per cent, respectively. Further, the most recent

five-year band (2013-2017) indicated a negative 85 per cent. The peer group of Canadian utilities

utilized by Concentric in its analysis ranged between negative 10 per cent and negative 158 per

cent. Peer analysis was rated high by Concentric in its analysis of this account.67 Concentric

explained that interviews with ATCO Gas operations and management personnel have indicated

that the company would not expect a significant change to the recent net salvage activity.68

81. Therefore, based on historical indications, the comments from ATCO Gas operations and

management personnel, and the indications from the peer group comparison of Canadian

utilities, Concentric viewed that negative 100 per cent best represents the net salvage expectation

for the investment in this account. However, Concentric noted that based on the Commission’s

comments within the recent Decision 3524-D01-2016,69 a more definitive and longer term trend

is required before a negative net salvage rate of more than negative 70 per cent is appropriate for

this account. Concentric went on to state that if the current net salvage trend continues, a more

negative net salvage recommendation may be appropriate.70

82. In response to a Commission IR, ATCO Gas noted that the system betterment capital

programs undertaken by ATCO Gas, the Plastic Mains Replacement Program and the Steel

Mains Replacement Program, did not result in a material change in net salvage for Account 475

Mains, when compared to the value from its last depreciation study. This is captured in the

following table.71

Account 475 Mains

Year Retirements

($)


($)

Cost-of-removal per cent


($)

Gross salvage per cent

Net salvage amount

($)

Net salvage per cent

1995-2017 48,561,582 -56,156,233 -116 1,576,704 3 -54,579,529 -112

1995-2009 13,411,865 -16,069,845 -120 259,629 2 -15,810,216 -118

2010-2017 35,149,717 -40,086,388 -114 1,317,075 4 -38,769,313 -110

Source: Exhibit 24188-X0040, ATCO-AUC2019FEB25-012, Table 1.

83. The UCA recommended72 that, if keeping with the traditional approach to net salvage for

Account 475 Mains, the existing net salvage rate should be retained:

The situation with respect to ATCO Gas Account 475 Distribution Mains (an increase

from negative 60 per cent to negative 70 per cent) directly parallels the Account 473

issues noted above… In respect of peers, the Account 475 submission in the Concentric

report indicates peer utilities range from negative 10 per cent to negative 158 per cent.

This range is misleading however as the negative 158 per cent rate only applies to bare

67 Exhibit 24188-X0071, ATCO-AUC-2019MAY28-003. 68 Exhibit 24188-X0001.01, application, Appendix A, pages 3-9 and 3-10. 69 Decision 3524-D01-2016: AltaLink Management Ltd., 2015-2016 General Tariff Application, Proceeding 3524,

Application 1611000-1, May 9, 2016. 70 Exhibit 24188-X0001.01, application, Appendix A, page 3-10. 71 Exhibit 24188-X0040, ATCO-AUC-2019FEB25-012, Table 1. 72 Exhibit 24188-X0087, UCA evidence, page 14.



steel mains. Enbridge has multiple Mains accounts, with coated steel at minus 51 per cent

and plastic at minus 38 per cent. Removing this from the comparison, the highest

composite rate is for Gazifere at negative 100 per cent, with all others of this group much

lower with ranges from negative ten per cent or negative 25 percent. The proposed rate of

negative 70 per cent also raises concerns over regulatory oversight, though not to the

same degree as the minus 125 per cent rate proposed to be applied to Account 473.

[footnote removed]

84. Mr. Kennedy responded that the Concentric recommendation of negative 70 per cent was

fully justified by the Concentric depreciation study report.73

85. Calgary supported the UCA’s recommendation for Account 475 Mains to retain the

existing net salvage rate and noted that the establishment of depreciation rates involves a great

deal of qualitative analysis.74

Commission findings

86. With respect to ATCO Gas’s request to a change in the net salvage rate for Account 475

Mains from negative 60 per cent to negative 70 per cent, the Commission considers there is

insufficient information on the record of this proceeding to conclude that this change is

warranted.

87. The Commission observes that the historical net salvage value for Account 475 Mains

has remained relatively stable, as evidenced in Table 5.75 Further, ATCO Gas operations and

management personnel do not expect a significant change to the recent net salvage activity. The

Commission also notes that Concentric presented comparators in the peer group that ranged

between negative 10 per cent and negative 158 per cent. This range is characterized by

significantly less negative net salvage values when compared to ATCO Gas’s historical net

salvages, which range from negative 38 per cent to negative 854 per cent, as stated above.

88. The Commission considers that a more definitive and longer term trend is required before

a more negative net salvage rate than the existing negative 60 per cent can be justified for this

account, including Concentric’s recommended increase to negative 70 per cent.

89. On the basis of these observations regarding the evidence, the Commission denies ATCO

Gas’s proposed negative 70 per cent net salvage rate for Account 475 Mains, and the current

negative salvage value of minus 60 per cent for this account is, therefore, retained.

5 ATCO Gas response to Direction 51

90. This section considers ATCO Gas’s compliance with Direction 51 of Decision 2011-

450,76 which dealt with the segregation of the Mains account (475) into plastic or steel pipe.

91. Paragraph 942 of Decision 2011-450 provided the following direction:

73 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, Appendix A, page 8. 74 Exhibit 24188-X0125, Calgary argument, paragraph 32. 75 Exhibit 24188-X0040, ATCO-AUC-2019FEB25-012, Table 1. 76 Decision 2011-450: ATCO Gas (A Division of ATCO Gas and Pipelines Ltd.), 2011-2012 General Rate

Application Phase 1, December 5, 2011.



The Commission considers that the determination of a depreciation rate for this account

has been particularly difficult given the size of the account and the mix of non-

homogeneous assets of different vintages. The Commission notes the discussion at the

hearing about the possibility of introducing accounting mechanisms to segregate the

account into multiple accounts of a more homogeneous nature. The lack of detailed

historical records was an impediment to further segregation at this time. The Commission

directs ATCO Gas to report in the compliance filing to this application on the feasibility

of further segregation of significant accounts on a go-forward basis.

92. As part of its 2011-2012 GRA compliance filing, ATCO Gas committed to provide this

information in a future application. In Decision 2012-191,77 paragraph 160, the Commission

confirmed the acceptability of this approach by stating:

ATCO Gas confirmed in its application that it will complete a study looking into the

further segregation of significant depreciation accounts on a go forward basis. The study

will then be brought to the Commission in a future application. For the purposes of this

application, ATCO Gas has complied with this direction, as a further study will be

conducted and provided to the Commission in a future application. [footnote removed]

93. In its response to the direction, ATCO Gas provided a review of peer Canadian natural

gas distribution companies with its application. The majority (60 per cent) of peer companies, as

shown in Table 6 below, do not segregate their Mains account by material.

Mains account segregation by Canadian distribution utilities

Utility Mains account segregated? Province

FortisBC Energy No British Columbia

Pacific Northern Gas No British Columbia

AltaGas Utilities Inc. No Alberta

SaskEnergy Inc. No Saskatchewan

Manitoba Hydro No Manitoba

Enbridge Gas Distribution Inc. Yes Ontario

Union Gas Yes Ontario

Energir (Gaz Metro) Yes Quebec

Gazifiere Inc. No Quebec

Heritage Gas Ltd. Yes Nova Scotia

Source: Exhibit 24188-X0001.01, application, paragraph 18 and Table 1.

94. ATCO Gas explained that segregating mains would require additional administrative

burden on a large number of historical mains projects as it does not have detailed retirement

records by material type. Steel and plastic service lives are considered to be similar due to

technological advances. ATCO Gas saw no tangible benefit to segregating the different types of

mains into subaccounts and viewed it as impractical to estimate the cost of segregating the Mains

account.

95. In response to an IR from the UCA,78 ATCO Gas stated that it is unable to provide any

working papers or background documentation of the Mains account other than what had been

provided previously in the application.

77 Decision 2012-191: ATCO Gas, 2011-2012 General Rate Application Phase 1 Compliance Filing, July 20,

2012. 78 Exhibit 24188-X0043, ATCO-UCA-2019FEB25-007(a).



96. In an IR response, the UCA provided an analysis of Account 475 data provided in the

current depreciation study,79 the results of which did not appear to support a clear conclusion that

the life characteristics were distinct for differing vintages or material types for this account. The

UCA concluded that the results were affected by the fact that, currently, less than 23 per cent of

ATCO Gas’s distribution system is composed of steel main, and also agreed with ATCO Gas’s

determination that as a result of advancement in cathodic protection and improved strength and

durability of the new generation polyethylene pipe, there is no significant difference between the

expected useful life of the steel and plastic mains. The UCA agreed that segregation of the Mains

account is not necessary.

97. The UCA recommended that responses to Commission directions that require a study to

be conducted or a report to be prepared should include documentation of such studies and

reports.

Commission findings

98. The initial response of ATCO Gas to Direction 51 in its application was materially

inadequate. The Commission was particularly concerned over the unavailability of supporting

background material given ATCO Gas’s commitment to conduct a study and provide it to the

Commission. The information subsequently provided in IR responses and the account data

analysis should have formed part of the initial application materials. Requiring the Commission

and parties to inquire after information that should have been provided in the application leads to

significant regulatory inefficiencies, lengthens proceeding timelines, and results in increased

costs to parties and ultimately to customers. Notwithstanding these considerations, on the basis

of the detailed responses by ATCO Gas to IRs, the Commission finds that ATCO Gas has

complied with Direction 51. The segregation of Account 475 Mains into separate accounts for

steel or plastic pipe will not be required at this time as the evidence of ATCO Gas and the UCA

confirms that steel and plastic service lives are considered to be similar due to technological

advances.

6 Rate shock

99. In its evidence, Calgary stated that the requested depreciation expense increase, when

added to previous “ATCO 2019 rate increases, will result in a cumulative 13% increase in ATCO

Gas south customer rates in 2019,” which will result in rate shock. Calgary recommended two

alternatives: (i) deny the application and make no adjustment to the 2018 going-in rates and base

K-bar amounts of ATCO Gas; and (ii) reduce the amount of depreciation expense recoverable by

ATCO in the going-in rates; this partial disallowance would “better reflect a competitive

marketplace in which ATCO Gas made its capital investments during the 2013-2017 PBR

term.”80

100. In its rebuttal evidence, ATCO Gas explained that it appears that Calgary derived the

cumulative 13 per cent increase by adding together the effects of each rate increase; i.e., it

appears Calgary derived the 13 per cent increase by adding together the approved 2019 PBR rate,

2019 Rider T, and proposed 2019 depreciation increase. ATCO Gas is of the view that this

79 Exhibit 24188-X0113, AUC-UCA-2019SEP30-006(c). 80 Exhibit 24188-X0086, Calgary evidence, pages 6-7.



approach is “illogical” as the rate increases listed in ATCO-CAL-2019FEB25-001(a)81 occur at

different times of the year and not all at one time. Also, in the current proceeding the

Commission approved a Rider S as an interim collection that recovers a portion of ATCO Gas’s

applied-for depreciation expense as per Decision 24188-D01-2019.82

101. Further, ATCO Gas stated that depreciation parameters should be determined on their

own merit and should not be denied on the basis that they may cause rate shock if a cumulative

rate impact assessment is implemented. Furthermore, it stated that a utility has the right to

recover its reasonably incurred costs and should not be prevented from doing so simply because

of rate shock, whether based on using the prior rate in effect or the aggregation of rate increases

over a period of time. ATCO Gas stated that a more logical approach is to phase in the increase if

the effect on rates is so great that it causes rate shock in a single year.83

102. In its argument, Calgary recommended that, “… the Commission ensure that if the

ATCO Application is approved, future rate increases be limited on an annual basis to the 10 per

cent threshold on a cumulative basis, as opposed to assessing rate shock each time a rate is

changed.”84

Commission findings

103. In the current proceeding, the Commission has considered changes in depreciation

parameters and depreciation expense arising from the ATCO Gas application. The Commission

does not consider that the increase in rates as a result of these changes, particularly when

evaluated cumulatively with a number of other changes to rates as a result of other rate-related

adjustments, is an adequate basis in and of itself to deny the application or otherwise reduce a

level of expense that the Commission has otherwise found to be reasonable and justified in this

case. However, the impact of this decision on rates will be addressed in ATCO Gas’s 2021

annual PBR rate adjustment filing, as directed earlier in this decision. The Commission may

evaluate the potential for rate shock during that proceeding and, if it finds that the rate

adjustments may result in rate shock, it may consider one or more options to mitigate this

concern at that time.

7 Order

104. It is hereby ordered that:

(1) ATCO Gas shall incorporate the depreciation rates reflective of the findings,

conclusions and directions in this decision in its 2021 annual performance-based

regulation rate adjustment filing.

Dated on February 20, 2020.

81 Exhibit 24188-X0051, ATCO-CAL-2019FEB25-001(a). 82 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, paragraphs 66-68 and Table 1. 83 Exhibit 24188-X0123, ATCO Gas rebuttal evidence, paragraphs 72 -73. 84 Exhibit 24188-X0125, Calgary argument, paragraph 10.




(original signed by)

Henry van Egteren

Vice-Chair


Bill Lyttle

Acting Commission Member


Carolyn Hutniak

Commission Member



Appendix 1 – Proceeding participants

Name of organization (abbreviation) Company name of counsel or representative

ATCO Gas and Pipelines Ltd. (ATCO Gas)

Bennett Jones LLP

Consumers’ Coalition of Alberta (CCA)

Office of the Utilities Consumer Advocate (UCA)

Brownlee LLP The City of Calgary (Calgary)

McLennan Ross Barristers and Solicitors

Alberta Utilities Commission Commission panel H. van Egteren, Vice-Chair B. Lyttle, Acting Commission Member C. Hutniak, Commission Member Commission staff

S. Sajnovics (Commission counsel) G. MacIntyre B. Edwards E. Deryabina



Appendix 2 – Summary of Commission directions

This section is provided for the convenience of readers. In the event of any difference between

the directions in this section and those in the main body of the decision, the wording in the main

body of the decision shall prevail.

1. ATCO Gas is directed to include revised schedules of depreciation parameters and rates

resulting from this decision in its 2021 annual performance-based regulation (PBR) rate

adjustment filing. The schedules also are to include updated schedules for determining

net annual depreciation expense and amortization of reserve differences. ........ paragraph 3



including recovery of the remaining depreciation expense shortfall. Rider S will remain

for the purposes of collecting a portion of the shortfall in depreciation expense until its

expiry on December 31, 2020. ......................................................................... paragraph 14

3. The Commission agrees that an examination of alternatives to the traditional method of

net salvage may be beneficial where there is a large gap between ATCO Gas’s net

salvage rates and those of its peers or where the traditional approach to net salvage may

result in atypical outcomes. The Commission considers that such an examination is better

undertaken in connection with the planning and preparation of a full depreciation study.

Such an approach, would also provide interveners with the opportunity to consider the

alternatives considered by ATCO Gas and, potentially, to respond with additional

alternative approaches. Accordingly, the Commission directs ATCO Gas, in its next

depreciation study, to review and report on alternatives to the traditional approach to net

salvage for any account in which ATCO Gas has proposed net salvage rates that are more

negative than negative 60 per cent, or for which the mean net salvage percentage for the

peer utility comparator group for ATCO Gas is more than 25 per cent different from the

net salvage rate proposed by ATCO Gas. ATCO Gas should explain in detail why the

alternative was either adopted or rejected. ...................................................... paragraph 66

atco gas and pipelines ltd.€¦ · 22394-d01-2018 limited to the method of accounting for new...

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