ENMAX Power Corporation - AUC€¦ · capital structure has diverged from the deemed capital...

Decision 22211-D01-2017

ENMAX Power Corporation Application for Finalization of Deemed Equity Ratio for 2016-2017 July 27, 2017

Alberta Utilities Commission

Decision 22211-D01-2017

ENMAX Power Corporation

Application for Finalization of Deemed Equity Ratio for 2016-2017

Proceeding 22211

July 27, 2017

Published by the:


Fifth Avenue Place, Fourth Floor, 425 First Street S.W.

Calgary, Alberta

T2P 3L8

Telephone: 403-592-8845

Fax: 403-592-4406

Website: www.auc.ab.ca

Decision 22211-D01-2017 (July 27, 2017) • i

Contents

1 Introduction ........................................................................................................................... 1

2 Background ........................................................................................................................... 2

3 Details of the application ...................................................................................................... 4 3.1 Historical comparison of actual equity ratios to deemed equity ratios for the years

2004 to 2014 ................................................................................................................. 4 3.2 Reasons given for the divergence of the actual and deemed equity ratios for 2015 ...... 5 3.3 Financing received from the Alberta Capital Financing Authority ............................... 9 3.4 Commitment to align the actual equity ratio and the deemed equity ratio, and future

reporting of the actual equity ratios ............................................................................ 11 3.5 The fair return standard ................................................................................................ 11

4 Comments of the Consumers’ Coalition of Alberta ......................................................... 11

5 Commission findings ........................................................................................................... 12

6 Implementation of Commission findings .......................................................................... 18

7 Order .................................................................................................................................... 19

Appendix 1 – Proceeding participants ...................................................................................... 21

Appendix 2 – Summary of Commission directions .................................................................. 22

List of tables

Table 1. Actual capital structure versus approved deemed capital structure 2004-2014 ... 4

Decision 22211-D01-2017 (July 27, 2017) • 1


Calgary, Alberta

ENMAX Power Corporation Decision 22211-D01-2017

Application for Finalization of Deemed Equity Ratio for 2016-2017 Proceeding 22211

1 Introduction

1. On November 30, 2016, ENMAX Power Corporation (ENMAX or EPC) filed an

application with the Alberta Utilities Commission requesting approval of a deemed equity ratio

of 37 per cent for its distribution and transmission functions for 2016 and 2017 on a final basis.

The deemed equity ratio of 37 per cent was previously approved as a placeholder for ENMAX in

Decision 20622-D01-2016 (the 2016 generic cost of capital (GCOC) decision).1

2. Notice of the application was issued by the Commission on December 1, 2016. Any party

wishing to register concerns about or support for the application was required to file a statement

of intent to participate (SIP) on or before December 15, 2016.

3. On December 2, 2016, the Commission received a SIP from FortisAlberta Inc., which

stated that Fortis did not object to the application and intended to monitor the proceeding as an

interested stakeholder. However, Fortis reserved the right to participate more actively as it

deemed necessary.

4. On December 6, 2016, the Commission received a SIP from the Consumers’ Coalition of

Alberta (CCA), wherein the CCA stated that it would like the opportunity to test the application

with a process of written information requests (IRs) before commenting on whether it would be

objecting to the application. The CCA also indicated an intention to file argument and reply.

5. After reviewing the application and the SIPs that were submitted by Fortis and the CCA,

the Commission determined that the application would be considered by way of a basic written

process proceeding2 to allow for a round of IRs to the applicant followed by the submission of

responses to the IRs. Following the review of the IR responses, parties were given the

opportunity to submit comments on whether further process was required.

6. Both the Commission and the CCA submitted IRs to ENMAX, and ENMAX filed its IR

responses on February 1, 2017. In its submission on the need for further process, the CCA stated

that it had reviewed the evidence on file and that it intended to file argument and possibly reply

argument. Accordingly, the Commission set dates of February 24, 2017, and March 3, 2017, for

the submission of written argument and reply, respectively.

7. On June 2, 2017, the Commission reopened the record of the proceeding and issued

a second round of IRs to ENMAX. Subsequent to this, the CCA requested the opportunity to

provide supplemental argument and reply on ENMAX’s responses to the Commission’s second

round of IRs. The Commission granted the CCA’s request and established dates for the

submission of additional argument and reply argument by parties. On June 16, 2017, the

Commission issued a third round of IRs to ENMAX. Following the submission of ENMAX’s

1 Decision 20622-D01-2016: 2016 Generic Cost of Capital, Proceeding 20622, October 7, 2016.

2 Bulletin 2015-09, Performance standards for processing rate-related applications, March 26, 2015.

Application for Finalization of Deemed Equity Ratio for 2016-2017 ENMAX Power Corporation

2 • Decision 22211-D01-2017 (July 27, 2017)

responses to the third round of IRs, additional argument was submitted by ENMAX and the CCA

on July 4, 2017, and additional reply argument was submitted by ENMAX on July 11, 2017, and

by the CCA on July 12, 2017.

8. The Commission considers that the close of record for this proceeding was July 12, 2017.

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

considered all relevant materials comprising the record of this proceeding and Proceeding 20622.

Accordingly, references in this decision to specific parts of the records 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

records with respect to that matter.

2 Background

10. On March 27, 2015, ENMAX filed an application with the Commission, which was

assigned Proceeding 20294, seeking approval to issue debt to its parent company and sole

shareholder, ENMAX Corporation.3 As part of that application, ENMAX also sought approval to

maintain an actual capital structure “that may differ from the deemed capital structure approved

by the Commission from time to time.”4 However, ENMAX indicated that it would continue to

set rates based on its approved capital structure.

11. In Decision 20294-D01-2015,5 the Commission did not deal with the merits of

ENMAX’s request regarding capital structure flexibility but rather directed ENMAX to bring it

forward in the next GCOC proceeding. The Commission reasoned as follows:

29. EPC’s request involves a method to obtain a [utility’s] return that has not been

evaluated or considered in the generic cost of capital proceedings, which are the

proceedings designed to consider questions of deemed capital structure and ROE [return

on equity], the most recent being the 2013 Generic Cost of Capital proceeding. The

Commission is not able to fully evaluate and consider EPC’s request given the limited

scope of information in this debt application. Therefore, the Commission will not

consider EPC’s request to maintain an actual capital structure that may differ from the

deemed capital structure in this application and instead, should EPC wish to pursue this

request, it is directed to bring forward this aspect of its application to the next generic

cost of capital proceeding, where it can be considered in the full context of setting a

capital structure and ROE.6

12. However, in Proceeding 20622, the 2016 GCOC proceeding, ENMAX did not pursue its

request to maintain an actual capital structure different from the requested deemed capital

structure. This was confirmed by Mr. Wood, counsel for ENMAX, during oral argument:

ENMAX’s actual capital structure was the subject of some discussion during the hearing.

For example, Mr. Finn asked Dr. Villadsen whether she was able to say whether

ENMAX intended to pursue the request that it made in its 2015 debt application for the

3 Exhibit 20294-X0001, EPC 2015 debt application.

4 Exhibit 20294-X0001, EPC 2015 debt application, paragraph 11.

5 Decision 20294-D01-2015: ENMAX Power Corporation, 2015 Application to Issue Debt, Proceeding 20294,

May 29, 2015. 6 Decision 20294-D01-2015, paragraph 29.


Decision 22211-D01-2017 (July 27, 2017) • 3

flexibility to maintain an actual capital structure different from its deemed capital

structure. Dr. Villadsen said that she didn't know, as did Dr. Carpenter. ENMAX does not

intend to pursue that request, as ENMAX stated in its response to information request

AUC-EPC-FEB18-001b. “However, to be clear, EPC is not willing to risk its ROE in

return for the requested flexibility. Consequently, if the Commission is of the view that

EPC must maintain an actual capital structure that is consistent with the approved

deemed capital structure in order to be permitted a reasonable opportunity to earn the

approved generic ROE, EPC will do so.” Now, ENMAX acknowledges that its actual

capital structure has diverged from the deemed capital structure in 2015 as a result of a

couple of factors, but ENMAX is committed to bringing its actual capital structure in line

with the approved capital structure by the end of 2016 and would accept a condition to

that effect in the Commission's 2016 generic cost of capital decision. ENMAX's request

in this proceeding is for an approved deemed equity thickness of 38 percent for

transmission and 42 percent for distribution. To be clear, ENMAX does not request that

its deemed capital structure be adjusted to conform to its current actual capital structure.

Rather, it will commit to adjusting its actual capital structure to conform to the approved

deemed capital structure. [footnote omitted]

13. Although ENMAX did not pursue its request for capital structure flexibility in the 2016

GCOC proceeding, ENMAX’s Rule 005 filings: Annual Reporting Requirements of Financial

and Operational Results, which were filed on the record of that proceeding, indicated that

ENMAX operated above the approved deemed equity level on a combined distribution/

transmission basis in 2013 by 400 basis points (bps) and by 100 bps in 2014.

14. The Rule 005 filings also indicated that in 2015, ENMAX actually operated on a

combined distribution/transmission year-end basis at 34 per cent equity, 500 bps lower than the

approved deemed equity level. Similarly, ENMAX’s actual 2015 year-end equity levels were

significantly lower than the deemed equity levels requested by ENMAX in the 2016 GCOC

proceeding for 2016 and 2017.

15. In the 2016 GCOC decision, the Commission noted that one possible conclusion that

could be drawn from ENMAX’s 2015 actual year-end capital structure as reflected in its

Rule 005 filings and ENMAX’s request in Proceeding 20294 to operate at different actual capital

structure levels than the approved deemed levels, was that the deemed equity components

determined in Decision 2191-D01-20157 (the 2013 GCOC decision) for ENMAX’s distribution

and transmission functions were higher than required to ensure that ENMAX had a reasonable

opportunity to earn a fair return. Ultimately, however, the Commission found that ENMAX was

not provided with an opportunity to address the issue fully in the 2016 GCOC proceeding, and

that there was insufficient evidence on the record to make a determination. Accordingly, the

Commission set an interim deemed equity ratio of 37 per cent for the distribution and

transmission functions of ENMAX for 2016 and 2017 as a placeholder, and directed ENMAX to

submit a compliance filing in order for the Commission to determine the final deemed equity

ratio for ENMAX for 2016 and 2017.8 The purpose of the present proceeding is to consider

ENMAX’s compliance filing application.

7 Decision 2191-D01-2015: 2013 Generic Cost of Capital, Proceeding 2191, Application 1608918-1, March 23,

2015. 8 Decision 20622-D01-2016, paragraph 611.


4 • Decision 22211-D01-2017 (July 27, 2017)

3 Details of the application

3.1 Historical comparison of actual equity ratios to deemed equity ratios for the

years 2004 to 2014

16. In its application, ENMAX indicated that historically, it has used a consolidated

distribution/transmission capital structure for borrowing purposes. Consistent with that approach,

the actual year-end debt and equity figures reported in its annual Rule 005 submissions for

distribution and transmission are consolidated figures.9 ENMAX submitted the following

information showing the actual year-end consolidated distribution/transmission equity ratios for

the years 2004 to 2014, as well as the deemed equity ratios for each of these years for its

distribution and transmission functions:

Table 1. Actual capital structure versus approved deemed capital structure 2004-2014

Year

EPC actual year-end blended equity ratio per Rule 005 filings

Deemed distribution equity ratio

Deemed transmission equity ratio

Decision number

(%)

2004 38 39 Not applicable 2004-05210

2005 39 39 Not applicable 2004-052

2006 38 39 35 2004-052

2007 39 39 35 2004-052

2008 39 39 35 2004-052

2009 42 41 37 2009-21611

2010 42 41 37 2009-216

2011 43 41 37 2011-47412

2012 42 41 37 2011-474

2013 44 40 Note 36 Note 2191-D01-2015

2014 41 40 Note 36 Note 2191-D01-2015

Note: In Decision 2191-D01-2015, ENMAX was awarded deemed equity ratios of 40 per cent and 36 per cent for distribution and transmission, respectively. However, Decision 2191-D01-2015 was not released until March 23, 2015. Therefore, ENMAX operated at the equity ratios that were in place from Decision 2011-474, which were 41 per cent and 37 per cent for distribution and transmission, respectively.

Source: Exhibit 22211-X0001, application, Table 3, PDF page 11.

17. ENMAX stated that the table demonstrates that ENMAX has been maintaining actual

consolidated distribution/transmission equity ratios close to, or higher than, the deemed equity

ratios for each of 2004 to 2014.13 In particular, ENMAX’s actual year-end consolidated

distribution/transmission equity ratios for the years 2013 and 2014 were higher than the deemed

equity ratios approved for both the distribution and transmission functions for those years.

ENMAX explained that this was a direct result of its commitment not to declare a dividend

between 2007 and 2013, which reflected the term of its formula-based ratemaking (FBR) period,

because the entirety of its net earnings during this period were to be reinvested to fund capital

projects.

9 Exhibit 22211-X0001, application, paragraph 15.

10 Decision 2004-052: Generic Cost of Capital, AltaGas Utilities Inc., AltaLink Management Ltd., ATCO Electric

Ltd. (Distribution), ATCO Electric Ltd. (Transmission), ATCO Gas, ATCO Pipelines, ENMAX Power

Corporation (Distribution), EPCOR Distribution Inc., EPCOR Transmission Inc., FortisAlberta (formerly

Aquila Networks), NOVA Gas Transmission Ltd., Proceeding 13130, Application 1271597-1, July 2, 2004. 11

Decision 2009-216: 2009 Generic Cost of Capital, Proceeding 85, Application 1578571-1, November 12, 2009. 12

Decision 2011-474: 2011 Generic Cost of Capital, Proceeding 833, Application 1606549-1, December 8, 2011. 13

Exhibit 22211-X0001, application, paragraph 15.


Decision 22211-D01-2017 (July 27, 2017) • 5

18. ENMAX clarified that its decision not to declare a dividend during the 2007 to 2013 FBR

period was not intended to cause its actual consolidated distribution/transmission equity ratios to

diverge from the approved deemed equity ratios for this period. Rather, it was intended to reduce

the need for a municipal rider over this period. ENMAX indicated that it asks The City of

Calgary to implement a municipal rider in order to fund capital spending for ENMAX’s

distribution function that exceeds the amount that the company can fund from internal sources.14

19. ENMAX also explained that the company’s cash balances and thus, actual equity ratios,

have grown over the course of the 2007 to 2013 FBR term.15 However, ENMAX elected not to

deviate from its commitment to not pay dividends during this period, and during 2014, for two

reasons. First, it anticipated that the Commission would approve an increase in the deemed

equity ratio for 2013-2015 as part of Proceeding 2191, the 2013 GCOC proceeding and, as a

result, more equity would have to be retained in the company. Second, ENMAX was in the midst

of a distribution cost-of-service proceeding in 2014, the outcome of which would have a direct

effect on the company’s earnings for 2014.16

3.2 Reasons given for the divergence of the actual and deemed equity ratios for 2015

20. In the 2013 GCOC decision, which established deemed equity ratios for Alberta utilities

for the years 2013-2015, the Commission established a deemed equity ratio of 40 per cent for

ENMAX’s distribution function and 36 per cent for ENMAX’s transmission function.17 When

reporting its actual capital structure results in its Rule 005 filings, ENMAX does not separately

show the debt and equity for its distribution and transmission functions, but instead reports the

actual debt and equity on a consolidated basis. Consequently, during the course of the 2016

GCOC proceeding, in order to compare the actual consolidated equity ratios of ENMAX for

2013, 2014 and 2015 to the deemed equity ratios established in the Commission’s 2013 GCOC

decision, it was necessary for the Commission to derive a deemed consolidated equity ratio.

The Commission described this in the 2016 GCOC decision as follows:

ENMAX’s Rule 005 reports do not separate capital structure information for transmission

and distribution. Using ENMAX’s 2015 Rule 005 reports, which includes information for

the 2013 calendar year, the deemed debt/equity ratio, on a combined distribution/

transmission basis, based on mid-year invested capital would be 61/39.18

21. In the current proceeding, the Commission set out details regarding how this deemed

61/39 consolidated distribution/transmission equity ratio was derived.19 On a consolidated

distribution/transmission basis, ENMAX indicated that its target equity ratio for 2015 was 39 per

cent.20 However, as noted above, in 2015 ENMAX operated on a combined distribution/

transmission year-end basis at 34 per cent, or 500 bps lower than the deemed consolidated equity

level.

14

Exhibit 22211-X0017, response to EPC-CCA-2017JAN17-008, PDF pages 11-12. 15

Exhibit 22211-X0001, application, paragraph 20. 16

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-016(b) and (c), PDF pages 132-133. 17

Decision 2191-D01-2015, paragraph 506. 18

Decision 20622-D01-2016, paragraph 598. 19

Exhibit 22211-X0010, EPC-AUC-2017JAN17-003, PDF page 2. 20



6 • Decision 22211-D01-2017 (July 27, 2017)

22. In this proceeding, ENMAX explained that two one-time accounting adjustments were

made to its 2015 financial statements that resulted in the actual consolidated distribution/

transmission equity ratio for 2015 being 34 per cent.21

23. The first adjustment was to the pension remeasurement following the adoption of

International Financial Reporting Standards (IFRS) in 2015. Under its previous accounting

standards, ENMAX was permitted to defer the actuarial remeasurement gains and losses

associated with post-retirement benefits, and amortize these gains and losses over the expected

average remaining service period of its active employees. However, this treatment is not

permitted under IFRS. Instead, all actuarial remeasurement gains and losses are recognized

immediately to other comprehensive income.22 ENMAX additionally explained that upon its

transition to IFRS in 2015, unamortized actuarial remeasurement losses in the amount of

$36.4 million were charged to retained earnings23 and thus, the 2015 actual year-end equity

figure was lower than expected by $36.4 million.24

24. ENMAX confirmed that if the actual consolidated distribution/transmission equity was

increased by $36.4 million at the end of 2015 to account for the one-time accounting adjustment

related to IFRS, the resulting actual year-end consolidated distribution/transmission equity ratio

for 2015 would have been 35.3 per cent.25

25. ENMAX indicated that the adjustment to the pension remeasurement following the

adoption of IFRS was purely a balance sheet entry, and that it did not affect customer rates.

ENMAX submitted that because it follows IFRS, any IFRS-related adjustments should be

included in the actual debt/equity capital structure that is reported for regulatory purposes.26

26. The second adjustment related to a dividend payment in the amount of $120 million that

ENMAX made in 2015 to its parent company, ENMAX Corporation.27 In its application,

ENMAX stated the following about the dividend:

However, in calculating the dividend, EPC failed to take into account the effect of the

IFRS pension adjustment (described above), and it also used an incorrect target equity

ratio to calculate the dividend. These two factors resulted in an equity ratio of 34%, as

shown in the 2016 Rule 005 filing for the 2015 calendar year.28

27. During the interrogatory stage of the proceeding, the Commission asked ENMAX to

indicate what the target equity ratio used by ENMAX was when it calculated the amount of the

dividend to be paid in 2015, and to explain how this target equity ratio was calculated.

ENMAX’s response was as follows:

The target equity ratio used by EPC in 2015 was the deemed (combined Transmission

and Distribution) ratio of 60/40. EPC established this target after receiving the 2013-2015

GCOC decision in March of 2015. In the application, EPC indicated that “it also used an

21





Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-015(a), PDF pages 130-131. 26

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-015(c) and (d), PDF page 131. 27

Exhibit 22211-X0001, application, paragraphs 20-21. 28



Decision 22211-D01-2017 (July 27, 2017) • 7

incorrect target equity ratio to calculate the dividend”. This error actually occurred during

the dividend calculation process.29

28. ENMAX explained that if it had not paid the $120 million dividend in 2015, the actual

consolidated distribution/transmission equity ratio as of December 31, 2015, would have been

38.47 per cent. In order to achieve an actual consolidated distribution/transmission equity ratio of

39 per cent at December 31, 2015, ENMAX would have been required to inject $15 million in

equity, and not pay any dividends.30

29. With respect to the process that ENMAX undertook when deciding to make a dividend

payment to ENMAX Corporation in 2015, ENMAX explained that ENMAX Corporation and the

management of ENMAX reviewed a staff recommendation to make the dividend payment as a

“means to reducing a perceived excess cash balance in EPC.”31 The recommendation was based

on a forecast cash balance and a forecast debt/equity split. ENMAX’s management accepted this

recommendation and proposed the dividend payment to the company’s Board of Directors.

The Board of Directors had final approval of the payment of the dividend.32

30. The Commission requested further information from ENMAX with regard to the

dividend payment of $120 million. The Commission asked ENMAX to include all the documents

that comprised the staff recommendation to make the dividend payment, including the forecast

cash balance and the forecast debt/equity split. In response, ENMAX provided four documents.

The first document was the staff recommendation.33 The second document included the data used

in the analysis reflected in the staff recommendation.34 The third document was the resolution of

EPC’s Board of Directors approving the declaration and payment of the dividend.35 The fourth

document was the management recommendation that went to EPC’s Board of Directors.36

31. ENMAX stated that the staff recommendation to declare a $120 million dividend was

made based on 2014 year-end figures with some forecast adjustments. It added that the staff

recommendation did not take into account the 2015 actuals to date and it also did not take into

account the IFRS adjustment relating to the pension remeasurement.37 ENMAX also stated the

following:

As indicated on page 5 of Attachment 1, the calculation of the dividend also used an

incorrect target equity ratio.38

32. Page 5 of the staff recommendation document submitted as Attachment 1 to the IR

response includes the following:

Dividend:

A $120M dividend in 2015 is the maximum cash reduction available without exceeding

63% Net Debt/(Net Debt + Equity).39

29

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-016(d), PDF page 134. 30

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-016(f), PDF pages 133-134. 31

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-016(e), PDF page 134. 32

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-016(e), PDF pages 133-134. 33

Exhibit 22211-X0035, Attachment 1 to the response to EPC-AUC-2017JUN02-004. 34




Exhibit 22211-X0030, response to EPC-AUC-2017JUN02-004, PDF page 5. 38

Exhibit 22211-X0030, response to EPC-AUC-2017JUN02-004, PDF page 5.


8 • Decision 22211-D01-2017 (July 27, 2017)

33. Page 3 of the staff recommendation document submitted as Attachment 1 to the IR

response includes the following:

Priority 2 is to set 2016-2019 (ACFA) [Alberta Capital Financing Authority] borrowing

and T&D [Transmission and Distribution] dividends such as to maintain ~$0 cash AND

keep Net Debt/Cap of 61% +/- 2% (close to deemed regulated capital structure)40

34. PDF page 3 of the document described as the management recommendation that went to

EPC’s Board of Directors describes the purpose of the $120 million dividend as follows:

The purpose of the 2015 dividend is to eliminate most of EPC’s existing $133 million

cash equivalent and adjust the EPC capitalization ratio (debt/debt+equity)

A $120 million dividend is the amount required to meet the 61% capitalization ratio as at

December 31, 2015

EPC has not paid a dividend since 2004. Since then, retained earnings of $390 million

had accumulated as at December 31, 2014.41

35. ENMAX’s use of the term “net debt” when describing its capital structure was

questioned by the Commission during the third round of IRs. In its responses to the

Commission’s third round of IRs, ENMAX clarified that it has always considered the deemed

capital structure established by the Commission to be based on gross debt and equity, and it

considers the company’s actual and deemed capital structures to consist of gross debt and

owner’s investment.42 ENMAX submitted the following to explain any confusion over the

terminology used when describing capital structure:

The confusion in EPC’s financial statements and internal materials, which often

use the term net debt, arises because for EPC, gross debt is the same as net debt

and EPC had fallen into the practice of using the term net debt.

Gross and net debt are the same within EPC because ENMAX Corporation uses a

cash concentration process (see attachment EPC-AUC-2017JUN16-002 b)

Attachment) which means that all cash and cash equivalents are concentrated at the

ENMAX Corporation level and as such, EPC’s cash and cash equivalents are

essentially zero at all times. Instead of cash, EPC’s accounts reflect a receivable

from ENMAX Corporation (i.e., which is recorded as a “Due to/Due From” entry).

EPC regrets the confusion that the use of term “net debt and owner’s investment”

in the EPC Financial Statements and internal materials has caused. EPC will take

steps to avoid this confusion in future.43

36. The Commission also questioned ENMAX regarding why its management would target a

net debt ratio within plus or minus two per cent of the deemed regulated capital structure, and not

target within a tighter band. In response, ENMAX submitted:

39

Exhibit 22211-X0035, Attachment 1 to the response to EPC-AUC-2017JUN02-004, PDF page 5. 40



Exhibit 22211-X0041, response to EPC-AUC-2017JUN16-002(a) and (b), PDF page 37. 43

Exhibit 22211-X0041, response to EPC-AUC-2017JUN16-002(b), PDF pages 37-38.


Decision 22211-D01-2017 (July 27, 2017) • 9

As explained in paragraph 21 of 2016 Generic Cost of Capital Compliance Filing, the

plus or minus two percent range was used in error.44

37. ENMAX submitted that the information it provided in response to the Commission’s

second round of IRs supports the conclusion that the divergence of its actual equity ratio for

2015 from the deemed equity ratio was inadvertent and unintentional. It added it is clear from the

presentation made to EPC’s Board of Directors that ENMAX believed the declaration of the

dividend would result in an actual equity ratio that was consistent with the deemed equity ratio.

ENMAX acknowledged that the capital structure analysis relied on in determining the quantum

of the dividend was flawed, and that an incorrect deemed equity ratio was used.45

38. ENMAX submitted that, in the second quarter of 2016, it identified the effect of the two

one-time accounting adjustments on the actual year-end consolidated distribution/transmission

equity ratio for 2015. Once ENMAX became aware of the inadvertent reduction in its actual

consolidated distribution/transmission equity ratio as of December 31, 2015, to 34 per cent, it

decided not to issue debt in 2016. ENMAX submitted that this would prevent further

deterioration of the actual consolidated distribution/transmission equity ratio in 2016.46

39. Finally, ENMAX submitted that since 2004, it has been consistently setting its rates

based on the deemed equity ratios. It stated that the divergence of the actual consolidated

distribution/transmission equity ratio for 2015 from the deemed equity ratio for that year resulted

in no additional costs to ENMAX’s ratepayers.47

3.3 Financing received from the Alberta Capital Financing Authority

40. ENMAX explained its ability to access funding by the Alberta Capital Financing

Authority (ACFA) through Calgary. ENMAX stated that ACFA is a provincial authority that acts

as an agent of the Alberta Crown, and the business of ACFA is to provide local entities with

financing for capital projects. ACFA’s borrowings are guaranteed by the Province of Alberta and

are at rates based on the Province of Alberta’s bond rating, which as of December 31, 2015, was

AAA.48

41. ENMAX indicated that while it cannot access ACFA funding directly, Calgary, which is

ENMAX’s ultimate shareholder, can access such funding, and ENMAX may request that

Calgary borrow ACFA funds on behalf of ENMAX. However, Calgary has absolute discretion to

decide whether or not to borrow ACFA funds on behalf of ENMAX.49

42. Because of this ability to leverage the Province of Alberta’s bond ratings when it obtains

debt through ACFA, ENMAX explained that its cost of debt is lower than other utilities in

Alberta.50 Specifically, ENMAX indicated that its actual weighted average embedded long-term

debt rate as of December 31, 2013, was 4.45 per cent, which was lower than the rate for the

44

Exhibit 22211-X0041, response to EPC-AUC-2017JUN16-003(b), PDF page 41. 45

Exhibit 22211-X0043, supplemental argument of ENMAX, paragraph 4. 46




Exhibit 22211-X0001, application, paragraph 10. Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-

012(a), PDF page 124. 50



10 • Decision 22211-D01-2017 (July 27, 2017)

distribution and transmission functions of ATCO Electric Ltd. and EPCOR Distribution &

Transmission Inc. and the distribution function of Fortis.51

43. Using its actual mid-year rate base for 2013, and the long-term debt rates for the

distribution and transmission functions of ATCO Electric Ltd. and EPCOR Distribution &

Transmission Inc. and the distribution function of Fortis, ENMAX demonstrated the cost savings

for its ratepayers in 2013 compared to the other utilities attributable to ENMAX’s lower cost of

long-term debt. The resulting cost savings were $4.7 million compared to Fortis, $5.9 million

compared to the distribution and transmission functions of ATCO Electric Ltd., and $7.1 million

compared to the distribution and transmission functions of EPCOR Distribution & Transmission

Inc.52 While there is a clear financial benefit to ratepayers from the use of ACFA funding,

ENMAX stated that it does not benefit from the use of this financing.53

44. ENMAX submitted that access to ACFA funding means that the company’s ability to

borrow is not affected by conventional credit metrics in the same way that the ability of other

utilities to borrow funds is affected.54 As far as ACFA is concerned, it lends funds to Calgary, not

to ENMAX. Consequently, the funding ENMAX receives from ACFA does not depend upon

metrics such as ENMAX’s interest coverage ratios or funds from operations (FFO)/debt ratio.55

ENMAX also stated that as long as it “has access to ACFA funding (through the City of

Calgary), the availability of debt financing or the cost of debt is not affected by EPC’s actual

capital structure.”56

45. ENMAX stated that as long as it borrows through ACFA, it “does not believe that the

credit metrics set out in Table 24 of Decision 20622-D01-2016 should necessarily be used when

determining a deemed capital structure for EPC.”57 At the same time, it submitted that it would

not be fair or reasonable for the Commission to determine a deemed equity ratio for ENMAX

based on the lower end of the credit metric guidelines included in Table 24 of the 2016 GCOC

decision.58

46. Further, ENMAX submitted that it would not be fair or reasonable for the Commission to

determine a deemed equity ratio for ENMAX that is different than the deemed equity ratio for

the other Alberta electric utilities. It reiterated that it gains no direct financial benefit from the

use of ACFA funding, and that “it should not be penalized in the form of a different capital

structure (or ROE) than that which is determined for similarly situated electric utilities who do

not access ACFA funding.”59

47. ENMAX stated that if the use of ACFA funding were to affect ENMAX negatively, in

the form of a lower deemed equity ratio or a reduced ROE, this would affect the return that

Calgary receives from ENMAX. It commented that this negative effect is something Calgary

would likely take into account in considering whether to allow ENMAX to continue to access

51

Exhibit 22211-X0001, application, Table 1, PDF page 7. 52

Exhibit 22211-X0001, application, Table 2, PDF page 8. 53



Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-012(a), PDF pages 124-125. 56

Exhibit 22211-X0017, response to EPC-CCA-2017JAN17-001, PDF page 1. 57



Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-012(c) and (d), PDF page 125.


Decision 22211-D01-2017 (July 27, 2017) • 11

ACFA funding. Without access to ACFA funding, ENMAX would need to raise long-term debt

in the market at interest rates similar to those received by other Alberta electric utilities.60

3.4 Commitment to align the actual equity ratio and the deemed equity ratio, and

future reporting of the actual equity ratios

48. For 2016 and subsequent years, ENMAX proposes to manage and report the actual debt

and equity figures separately for its distribution and transmission functions.61

49. Additionally, ENMAX stated that it would ensure that there is sufficient equity in the

company to align the actual equity ratios for its distribution and transmission functions to the

deemed equity ratios by the end of 2016. ENMAX forecast its equity at the end of 2016 and

2017 to be 37 per cent for both the distribution and transmission functions.62

3.5 The fair return standard

50. ENMAX submitted that the fair return standard does not require a utility to maintain an

actual equity ratio equal to the deemed equity ratio and provided various examples from both the

U.S. and Canada in support of its submission.63 However, ENMAX acknowledged that this is a

matter of discretion for the utility’s regulator.64 ENMAX added that it is not willing to risk its

ROE in return for the flexibility to maintain an actual equity ratio that is different from the

deemed equity ratio,65 and confirmed that it is no longer pursuing its request for capital structure

flexibility.66

4 Comments of the Consumers’ Coalition of Alberta

51. In its initial argument, the CCA submitted that ENMAX is likely at lower risk due to the

direct support of Calgary and the indirect access to ACFA funding, and that this lower risk

would likely justify a lower deemed equity ratio for ENMAX.67 However, the CCA indicated that

it had not carried out any analysis to support this claim or to determine what a reasonable

reduction to ENMAX’s deemed equity ratio would be.68 Consequently, the CCA did not make

any recommendation for a reduction to ENMAX’s deemed equity ratio.69 The CCA submitted

that this issue should perhaps be discussed in the next GCOC proceeding.70

52. In its supplemental argument, the CCA submitted that the gross debt of ENMAX cannot

be the same as net debt, unless the cash surplus that is swept into ENMAX Corporation

extinguishes the long-term debt.71 The CCA’s understanding is that ENMAX has surplus cash

that has been generated by higher debt than it needs, for a receivable, and a receivable should not

60

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-012(c) and (d), PDF pages 125-126. 61


Exhibit 22211-X0001, application, paragraphs 23-24. 63

Exhibit 22211-X0017, response to EPC-CCA-2017JAN17-007(a), PDF page 9; Exhibit 22211-X0001,

application, paragraph 49. 64



Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-001, PDF page 1. 67

Exhibit 22211-X0023, the CCA’s argument, paragraph 19. 68

Exhibit 22211-X0023, the CCA’s argument, paragraphs 19 and 22. 69



Exhibit 22211-X0042, the CCA’s supplemental argument, paragraph 5.


12 • Decision 22211-D01-2017 (July 27, 2017)

be netted against debt.72 The CCA stated that by ENMAX borrowing more money than it needs,

and then loaning the excess cash to its affiliates, ENMAX has increased its risk.73 In reply,

ENMAX submitted that there is no evidence at all to support this suggestion.74

53. The CCA took issue with ENMAX’s statement that the actual cash and cash equivalents

at December 31, 2015, were zero. The CCA reproduced information that was provided by

ENMAX on the record of two other proceedings, that showed the year end cash balances for

distribution and transmission.75

54. The CCA submitted that on a gross basis, ENMAX has overstated its actual equity

percentages in its Rule 005 reports for 2015. Using the information on capital structure set out in

Note 14 of ENMAX’s 2015 audited financial statements, the CCA calculated the actual

consolidated equity ratio at year-end 2015 to be 33.8 per cent, and noted that the actual equity

dollars were $538.538 million. The CCA compared the 33.8 per cent figure to the information set

out in Schedule 2 of ENMAX’s Rule 005 report for 2015 for transmission, which showed an

equity ratio of 36 per cent and equity dollars of $141.204 million; and to the information set out

in Schedule 2 of ENMAX’s Rule 005 report for 2015 for distribution, which showed an equity

ratio of 40 per cent and equity dollars of $437.227 million. The CCA stated that in both cases,

the Rule 005 reports overstate the actual equity ratio, and on a consolidated basis the Rule 005

reports overstate the actual equity dollars.76 In reply, ENMAX indicated that the Rule 005 figures

cited by the CCA are based on the deemed equity ratios that are used for ratemaking purposes

and for calculating the actual ROE, while the equity shown in the audited financial statements is

the company’s actual equity.77

55. The CCA recommended that the actual gross debt figures be used when calculating

capital structure ratios.78 It added that ENMAX “… had less than the generally approved GCOC

equity thickness.”79 and “Further, EPC has stated that equity thickness does not matter for the

risk profile of EPC.”80 The CCA submitted that the Commission “… should only allow the actual

equity thickness for 2015.”81

5 Commission findings

56. In Decision 2009-216, the Commission set out the fair return standard, indicating that it

must consider three factors when setting a rate of return; namely. “comparable investments,”

“capital attraction” and “financial integrity.”82 In that same decision, the Commission noted the

ruling of the Supreme Court in Northwestern Utilities83 in which the court opined on what was

meant by a “fair return”:

72

Exhibit 22211-X0042, the CCA’s supplemental argument, paragraph 6. 73


Exhibit 22211-X0044, ENMAX’s supplemental reply argument, paragraph 14. 75

Exhibit 22211-X0042, the CCA’s supplemental argument, paragraphs 15-17. 76

Exhibit 22211-X0042, the CCA’s supplemental argument, paragraphs 18-19. 77

Exhibit 22211-X0044, ENMAX’s supplemental reply argument, paragraph 25. 78





Decision 2009-216, paragraph 94. 83

[1929] S.C.R. 186 (Northwestern Utilities).


Decision 22211-D01-2017 (July 27, 2017) • 13

By a fair return is meant that the company will be allowed as large a return on the capital

invested in its enterprise (which will be net to the company) as it would receive if it were

investing the same amount in other securities possessing an attractiveness, stability and

certainty equal to that of the company’s enterprise.84

57. The court further observed that the utility regulator has a duty “to fix fair and reasonable

rates; rates which, under the circumstances, would be fair to the consumer on the one hand, and

which, on the other hand, would secure to the company a fair return for the capital invested.”85

In a similar vein, the Supreme Court of the United States clarified that the “ratemaking process,”

which requires the “fixing of ‘just and reasonable rates,’ involves the balancing of the investor

and the consumer interests.”86

58. In its past GCOC decisions, most recently in the 2013 GCOC decision and the 2016

GCOC decision, the Commission has satisfied the fair return standard by establishing a generic

ROE that uniformly applied to all of the affected utilities and then accounted for the particular

business risks faced by individual utilities, or categories of utilities, by making adjustments to

their respective deemed equity ratios on either a global or individual basis. The combination of

the ROE and deemed equity ratio for each utility is intended to satisfy the fair return standard so

as to (1) maintain the financial integrity of the company by ensuring it can raise capital to

finance its operations and any required investment, (2) provide a reasonable opportunity for the

company to earn a return on the deemed equity investment of its shareholders comparable to

investments of similar risk, and (3) ensure that utility rates are just and reasonable.

59. A utility’s revenue requirement and, accordingly, its approved rates are established using

the approved generic ROE and its deemed equity ratio. The Commission accepts that the actual

equity ratios maintained by a utility, either on a year-end or mid-year basis, will not always be

the same as the deemed equity ratio at any given time. Differences can result from such events as

regulatory lag in issuing GCOC decisions, variations in net income, the timing and value of

capital expenditures, the timing and amount of debt issues and the payment of dividends.

Accordingly, at any point in time, the actual equity ratio, either on a year-end or mid-year basis,

may be either higher or lower than the deemed amount. This deviation from the deemed ratio

may well be transitory. It is reasonable to expect, however, given the Commission’s finding that

a combination of deemed capital structure and allowed ROE will satisfy the fair return standard

for a given utility, that a utility will target its actual capital structure to match its approved

deemed capital structure on an annual basis in order to have a reasonable opportunity to earn

a fair rate of return and to maintain its ability to raise capital.

60. If a utility’s actual equity ratio departs sufficiently without reasonable explanation from

the deemed equity ratio, whether the departure is intentional or not, then this may be signalling a

shift in the risk profile of the utility, or that the equity ratio established in the relevant GCOC

decision was incorrect or may be incorrect on a go-forward basis. It suggests that something

other than the existing deemed equity ratio will be sufficient, or may be required, to satisfy the

fair return standard. Accordingly, a deviation of this nature may require the Commission to

consider future adjustment to a utility’s deemed equity ratio to ensure that the fair return standard

continues to be satisfied and that rates continue to be just and reasonable. One indicator that

something other than the deemed equity ratio may be sufficient is evidence that a divergence in

84

[1929] S.C.R. 186 (Northwestern Utilities). pages 192-193. 85

Decision 2009-216, paragraph 88, Northwestern Utilities, paragraph 192. 86

Hope Natural Gas Company, 320 U.S. 591 (1944) (Hope) page 603, Decision 2009-216, paragraph 92.


14 • Decision 22211-D01-2017 (July 27, 2017)

equity ratios does not impair the utility’s ability to raise capital. In this regard, the Commission

notes the finding of its predecessor, in Alberta Energy and Utilities Board Decision 2003-071,

that “the actual equity ratios and other key debt-rating-agency ratios of Canadian regulated

utilities of comparable risk, with adequate credit ratings, are useful and objective indicators of an

appropriate equity ratio.”87

61. In the 2016 GCOC decision, the Commission noted that one possible conclusion that

could be drawn from ENMAX’s actual results in its Rule 005 report for 2015 and ENMAX’s

request in Proceeding 20294 to operate at equity ratios different than the approved deemed

equity ratios was that the deemed equity ratios determined in the 2013 GCOC decision for

ENMAX’s distribution and transmission functions were higher than required to satisfy the fair

return standard. If the deemed equity ratios determined in the 2013 GCOC decision for

ENMAX’s distribution and transmission functions were higher than required to satisfy the fair

return standard, then rates were higher than necessary, to the detriment of ratepayers.

62. ENMAX stated that it “… had targeted its actual capital structure in 2015 to a blended

Distribution-Transmission rate of 61% debt and 39% equity until two one-time accounting

adjustments were made to EPC’s financials.”88 ENMAX also stated that “It is EPC

management’s responsibility to monitor the actual capital structure in order to keep it consistent

with the deemed capital structure.”89

63. ENMAX’s stated intention was to target the 2015 actual year-end equity ratio to be

39 per cent, equal to the deemed consolidated equity ratio. However, at year-end 2015, ENMAX

was actually operating on a consolidated distribution/transmission basis at 34 per cent equity

without any apparent impairment to its ongoing operations, its financial integrity or its ability to

raise capital in 2015 or in future years. ENMAX submitted that this divergence in 2015 from the

deemed equity ratio was inadvertent and unintentional. However, as the Commission indicated

above, even if the divergence was not intentional, the Commission has to assess whether the

divergence signals a shift in the risk profile of the utility. No party submitted any information

during this proceeding to demonstrate that ENMAX’s risk profile increased as a result of

operating with an actual equity ratio of 34 per cent at year-end 2015.

64. ENMAX explained that two one-time accounting adjustments were made to its 2015

financial statements that resulted in the actual year-end consolidated distribution/transmission

equity ratio for 2015 being 34 per cent. Those two adjustments were an IFRS adjustment and a

dividend payment of $120 million.

65. The Commission asked ENMAX to “… comment on whether the actual debt/equity

capital structure reported for regulatory purposes for EPC should include adjustments such as the

pension remeasurement, or whether these types of transitional ‘book’ entries should be excluded

when calculating the actual debt/equity capital structure for regulatory purposes.”90 ENMAX

responded as follows:

87

Decision 2003-071: ATCO Electric Ltd., 2003-2004 General Tariff Application, Rate Case Deferrals

Applications, 2001 Deferral Application, Applications 1275494-1, 12755389-1, 1275540-1, October 2, 2003,

page 45, PDF page 51. 88


Exhibit 22211-X0041, response to EPC-AUC-2017JUN16-002(f), PDF page 38. 90

Exhibit 22211-X0010, EPC-AUC-2017JAN17-015(d), PDF page 9.


Decision 22211-D01-2017 (July 27, 2017) • 15

EPC follows IFRS, and therefore submits that any IFRS related adjustments should be

included.91

66. Based on ENMAX’s response, the Commission accepts ENMAX’s explanation that the

adjustment to the pension remeasurement following the adoption of IFRS was purely a balance

sheet entry and the Commission will consider the effect on ENMAX’s actual year-end equity

ratio for 2015 as a result of the IFRS adjustment.

67. The primary reason that the actual year-end consolidated distribution/transmission equity

ratio for 2015 was lower than the 39 per cent target was the payment of the $120 million

dividend to ENMAX Corporation in November 2015. The dividend was declared on

November 4, 2015, and it was paid in full on November 30, 2015.92 If ENMAX had not paid this

dividend in 2015, the actual year-end consolidated distribution/transmission equity ratio for 2015

would have been 38.47 per cent.93

68. As set out in Section 3.2 of this decision, ENMAX submitted that it used an incorrect

target equity ratio when it calculated the dividend amount, and has acknowledged that the capital

structure analysis that formed part of the recommendation to support the payment of the dividend

was flawed. ENMAX’s submission is that its stated intention was to target the 2015 actual year-

end equity ratio to be 39 per cent after the $120 million dividend payment. However, the staff

recommendation document that was prepared for management in support of the $120 million

dividend payment indicates that the forecast year-end equity ratio for 2015 after the payment of

the $120 million dividend would be 37 per cent; 200 basis points below the deemed equity ratio.

In particular, the Commission notes the following statements as set out on pages 3 and 5 of the

staff recommendation:

Page 3:

Priority 2 is to set 2016-2019 (ACFA) [Alberta Capital Financing Authority] borrowing

and T&D [Transmission and Distribution] dividends such as to maintain ~$0 cash AND

keep Net Debt/Cap of 61% +/- 2% (close to deemed regulated capital structure)94

Page 5:

Dividend:

A $120M [million] dividend in 2015 is the maximum cash reduction available without

exceeding 63% Net Debt/(Net Debt + Equity).95

69. It is apparent that the staff recommendation contemplated an equity ratio that could be as

low as two per cent below the deemed equity ratio of 39 per cent. Further, in order to exceed a

63 per cent debt ratio (or correspondingly adopt an equity ratio lower than 37 per cent), ENMAX

would have had to pay more than $120 million in dividends. Based on the staff recommendation

document which outlined that “Priority 1 is to eliminate T&D’s existing $133 M cash equivalent

91

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-015(d), PDF page 131. 92

Exhibit 22211-X0012, attachment to the response to EPC-AUC-2017JAN17-008, PDF page 40. 93

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-016(f), PDF page 134. 94


Exhibit 22211-X0035, Attachment 1 to the response to EPC-AUC-2017JUN02-004, PDF page 5.


16 • Decision 22211-D01-2017 (July 27, 2017)

ASAP [as soon as possible],”96 the Commission considers that ENMAX would have preferred to

pay more than $120 million in dividends, but the restriction on doing so was the resulting capital

structure. Consequently, there is evidence that ENMAX did not wish to exceed a 63 per cent debt

ratio (or correspondingly adopt an equity ratio below 37 per cent). This evidence supports the

Commission’s finding that ENMAX staff and management targeted a 2015 year-end equity ratio

of 37 per cent in their analysis conducted in support of paying the $120 million dividend.

70. The Commission notes that the staff recommendation document included a set of pro-

forma financials for transmission and distribution,97 to account for the $120 million

recommended dividend payment. After reviewing these pro-forma financials, it is clear to the

Commission that there are amounts shown for “Cash and cash equivalents” under the “Assets”

section of the balance sheet. The amount of forecast cash and cash equivalents shown for year-

end 2015 was $48.181 million.

71. Based on ENMAX’s submission that “… EPC’s cash and cash equivalents are essentially

zero at all times,” it is unclear why the management of ENMAX, after reviewing the pro forma

financials for transmission and distribution, did not question why there were amounts included in

the analysis for cash and cash equivalents.

72. As a result of the forecast $48.181 million included in the cash and cash equivalents line

for year-end 2015, as part of the staff recommendation document, the analysis was flawed. The

resulting forecast net debt ratio for year-end 2015, after the $48.181 million was deducted from

the gross debt, was 63.3 per cent, which is a corresponding equity ratio of 36.7 per cent. If the

$48.181 million had not been included in the cash and cash equivalents line, and instead the cash

and cash equivalents had been zero, the resulting forecast debt ratio for year-end 2015 after

accounting for a $120 million dividend payment, would have been 64.4 per cent, which has a

corresponding equity ratio of 35.6 per cent.98 If this flaw had been discovered, the amount of the

dividend payment in 2015 would have been determined to be lower than $120 million in order

not to drop below the new target equity ratio of 37 per cent for 2015 year-end.

73. ENMAX submitted that it is clear from the presentation made to its Board of Directors

that the company believed the declaration of the dividend would result in an actual equity ratio

that was consistent with the deemed equity ratio. The Commission acknowledges the statement

included on the management recommendation document that went to ENMAX’s Board of

Directors, which set out that “[a] $120 million dividend is the amount required to meet the 61%

capitalization ratio as at December 31, 2015.”99 However, no information was provided by

ENMAX that demonstrated that this statement made to the Board of Directors was supported by

any analysis other than the staff recommendation.

74. ENMAX described the process it undertook when it decided to make the dividend

payment as follows:

ENMAX Corporation and EPC management reviewed a staff recommendation to make

an EPC dividend payment to EC as a means to reducing a perceived excess cash balance

96



Exhibit 22211-X0036, Attachment 2 to the response to EPC-AUC-2017JUN02-004, worksheet titled “Medium

Debt Scenario A,” cell I107. 99

Exhibit 22211-X0038, Attachment 4 to the response to EPC-AUC-2017JUN02-004, PDF page 3.


Decision 22211-D01-2017 (July 27, 2017) • 17

in EPC. The staff recommendation is formed based on a forecast cash balance and

forecast debt/equity split. Management accepted this recommendation and proposed the

dividend payment to the EPC Board of Directors. The EPC Board of Directors had final

approval of the payment of the dividend.100

75. The process described by ENMAX does not include any analysis other than the staff

recommendation, and the backup to support the staff recommendation document demonstrated

that the forecast debt ratio for year-end 2015 after the payment of the $120 million dividend,

would be 63.3 per cent. ENMAX did not offer an explanation of the apparent contradiction

between the recommendations and analysis in the staff documentation supporting the dividend

payment and the management recommendation document that went to ENMAX’s Board of

Directors, which appeared to have been based on the staff analysis. Specifically, no explanation

was provided as to why the management recommendation would include a forecast equity ratio

for 2015 year-end of 39 per cent, instead of 37 per cent.

76. Regardless of ENMAX’s errors in calculating the resulting equity ratio for 2015, the

result was that ENMAX demonstrated that it was capable of paying a substantial dividend and

operating at an actual year-end equity ratio of 34 per cent for 2015 (35.3 per cent after correction

for the IFRS pension remeasurement adjustment) without any apparent impairment to its ongoing

operations, its financial integrity or its ability to raise capital. There is no evidence that operating

at a significantly lower year-end actual equity ratio in 2015 of 34 per cent (35.3 per cent after

correction for the IFRS pension remeasurement adjustment) had any effect on ENMAX’s

operations or on its ability to raise long-term debt or attract equity investment in 2015 or in

future years. Further, the Commission observes that the management fee of 0.25 per cent on the

average monthly outstanding debenture balance, charged by Calgary, was not affected by this

actual consolidated equity ratio.

77. Given all of the foregoing, in exercising its judgement in balancing the interests of

ENMAX’s equity investors and ratepayers, this evidence suggests to the Commission that a

deemed consolidated distribution/transmission equity ratio of less than the 37 per cent deemed

equity ratio awarded to other distribution and transmission utilities in Decision 20622-D01-2016

for 2016 and 2017 is warranted for ENMAX.

78. In addition, on March 27, 2015, eight months prior to the $120 million dividend payment,

ENMAX sought approval to maintain an actual capital structure “that may differ from the

deemed capital structure approved by the Commission from time to time,” while continuing to

set rates based on its approved capital structure. In the Commission’s view, this request further

supports a finding that ENMAX considered it could maintain its financial integrity and ability to

attract capital with an actual equity ratio that was different from the deemed equity ratio.

79. Table 1 of this decision demonstrates that on a year-end basis, ENMAX has maintained

its actual consolidated distribution/transmission equity ratio within one to two percentage points

of the deemed consolidated equity ratio during the 2004-2014 period, except in 2013 where the

allowed deemed equity ratio was not determined until after the end of 2013. As noted above, the

actual consolidated equity ratio for ENMAX in 2015 was 34 per cent (35.3 per cent after

correction for the IFRS pension remeasurement adjustment) compared to the deemed

consolidated equity ratio of 39 per cent.101 In the Commission’s view, 2015 reflects a significant

100

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-016(e), PDF page 134. 101

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-015(a), PDF pages 130-131.


18 • Decision 22211-D01-2017 (July 27, 2017)

departure from historical patterns and the Commission has considered this variance in assessing

the fair return standard and determining a deemed equity ratio for ENMAX in subsequent years.

80. This deviation from historical variances and more importantly, the apparent ability of the

company to operate at a significantly lower year-end equity ratio when compared to the deemed

equity ratio without impairment to its ongoing operations, its financial integrity or its ability to

raise capital, is a material consideration supporting an ENMAX, company-specific reduction to

the 37 per cent equity ratio determined in Decision 20622-D01-2016 as meeting the fair return

standard for Alberta transmission and distribution utilities for 2016 and 2017. Further, there is no

evidence on the record of this proceeding or in Proceeding 20622 to suggest that there were

countervailing ENMAX-specific risk factors that would support an increase to its deemed equity

ratio over the equity ratio deemed for other utilities. These ENMAX-specific findings cannot be

overlooked, notwithstanding the submissions of ENMAX during the 2016 GCOC proceeding

and, during this proceeding,102 that the company is no longer pursuing the request that it made in

its 2015 debt application for the flexibility to maintain an actual capital structure different from

its deemed capital structure.

81. In light of these findings, it is the judgment of the Commission after a consideration of

the fair return standard that the deemed equity ratio for ENMAX for 2016 and 2017 should be

36 per cent. The Commission considers that a deemed equity ratio of 36 per cent when

multiplied by the ROE percentages established in Decision 20622-D01-2016 will provide

ENMAX with a reasonable opportunity to earn a fair return in 2016 and 2017. The Commission

considers that setting the deemed equity ratios for ENMAX’s distribution and transmission

functions for 2016 and 2017 at 36 per cent will result in just and reasonable rates for ENMAX

and its ratepayers and that a 36 per cent deemed equity ratio when multiplied by the ROE

percentages established in Decision 20622-D01-2016 will satisfy the fair return standard.

Therefore, the Commission approves, on a final basis, a deemed equity ratio of 36 per cent for

the transmission and distribution operations of ENMAX for 2016 and 2017.

6 Implementation of Commission findings

82. Currently, ENMAX has a 2016-2017 transmission general tariff application that is being

processed by the Commission.103 As part of its decision on that application, the Commission will

provide directions to ENMAX transmission with respect to implementing the final approved

deemed equity ratio for 2016 and 2017 determined in this decision.

83. Regarding ENMAX’s distribution function, the Commission directs ENMAX to reflect

the final approved deemed equity ratio of 36 per cent for 2016-2017 in its ongoing capital tracker

application (Proceeding 21508104) as part of either the negotiated settlement agreement (if

reached) or an application update to be submitted before the oral hearing, unless directed

otherwise in that proceeding. As well, the Commission directs ENMAX to reflect the final

approved deemed equity ratio of 36 per cent for 2016-2017 in its ongoing rebasing application

(Proceeding 22394105), as part of the rebuttal evidence and application update due August 16,

102

Exhibit 22211-X0012, response to EPC-AUC-2017JAN17-001, PDF page 1. 103

Proceeding 22238. 104

Proceeding 21508: ENMAX Power Corporation - Distribution 2015-2017 Capital Tracker Application. 105

Proceeding 22394: Rebasing and Setting the Going-In rates for the 2018-2022 Performance-Based Regulation

plans.


Decision 22211-D01-2017 (July 27, 2017) • 19

2017. Further, the Commission directs ENMAX to submit a post-disposition correspondence in

the current Proceeding 22211 by September 1, 2017, identifying any other matters related to

determining ENMAX’s distribution rates for 2016-2017 that are affected by the Commission’s

determinations in this decision, together with ENMAX’s proposal on how and when to

implement any such changes.

7 Order

84. It is hereby ordered that:

(1) The final approved deemed equity ratio for 2016 and 2017 for the distribution and

transmission functions of ENMAX Power Corporation is 36 per cent.

(2) ENMAX Power Corporation will implement the Commission’s findings in this

decision, as set out in Section 6 of this decision.

Dated on July 27, 2017.


(original signed by)

Mark Kolesar

Vice-Chair


Bill Lyttle

Commission Member


Henry van Egteren

Commission Member


Decision 22211-D01-2017 (July 27, 2017) • 21

Appendix 1 – Proceeding participants

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

ENMAX Power Corporation (ENMAX or EPC)

Torys LLP

Consumers’ Coalition of Alberta (CCA) FortisAlberta Inc.

Alberta Utilities Commission Commission panel M. Kolesar, Vice-Chair B. Lyttle, Commission Member H. van Egteren, Commission Member Commission staff

B. McNulty (Associate General Counsel) D. Mitchell C. Malayney


22 • Decision 22211-D01-2017 (July 27, 2017)

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. Regarding ENMAX’s distribution function, the Commission directs ENMAX to reflect

the final approved deemed equity ratio of 36 per cent for 2016-2017 in its ongoing capital

tracker application (Proceeding 21508) as part of either the negotiated settlement

agreement (if reached) or an application update to be submitted before the oral hearing,

unless directed otherwise in that proceeding. As well, the Commission directs ENMAX

to reflect the final approved deemed equity ratio of 36 per cent for 2016-2017 in its

ongoing rebasing application (Proceeding 22394), as part of the rebuttal evidence and

application update due August 16, 2017. Further, the Commission directs ENMAX to

submit a post-disposition correspondence in the current Proceeding 22211 by

September 1, 2017, identifying any other matters related to determining ENMAX’s

distribution rates for 2016-2017 that are affected by the Commission’s determinations in

this decision, together with ENMAX’s proposal on how and when to implement any such

changes. ........................................................................................................... Paragraph 83

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