Alberta Utilities Commission

The Situation

In 2010, the Alberta Utilities Commission (AUC) began an initiative to reform utility rate regulation in Alberta, Canada. The AUC envisioned a two-stage process. The first stage would be implementation of a form of performance-based regulation (PBR) for electric and natural gas distribution companies in place of the existing traditional "rate of return" regulation system. The initiative's second stage would consist of generic reviews of legal and economic issues related to utility regulation with the goal of making regulatory system more consistent among companies, more predictable over time, and more efficient.

The AUC invited interested parties to assist in determining the scheduling and scope for stage one -- PBR implementation -- and initiated a proceeding to solicit comments on the principles that should guide the development of PBR in Alberta. The AUC's goal was to implement a PBR effective 1 January 2013.

NERA's Role

The AUC retained NERA (specifically Dr. Jeff D. Makholm and Dr. Agustin Ros) as its independent experts to prepare a total factor productivity (TFP) growth study that could be used as the basis for determining a productivity factor ("X-factor") in a PBR plan for the electricity and natural gas distribution industries. A TFP growth analysis was a necessary step since the AUC opted for an approach to set the X-factor based on the average rate of productivity in the industry.

To conduct such an analysis, NERA examined a population of 72 US electric and combination electric/gas companies from 1972 to 2009 using index number techniques for this industry pioneered by Dr. Makholm in his graduate work at the University of Wisconsin. NERA found that the applicable TFP growth was 0.96 percent. In 2011, the AUC expanded NERA's role, asking Dr. Makholm and Dr. Ros to prepare a report that would provide the AUC and other interested parties with "independent, expert critical analysis and evaluation of the material aspects" of applications submitted by utilities and intervener evidence submitted as part of the PBR implementation process. Virtually every expert on utility productivity studies in North America appeared for either the utilities or industrial/civic interveners in the case. Points of contention among the various experts in the weeks of public hearings included: (1) the source of data for such an analysis, (2) the applicable time period, (3) whether a single source of data would be useful for both Alberta's electric and gas distributors, and (4) whether econometric or other more statistical techniques could be useful for "targeting" the X-factor for particular utilities.

The Result

In September 2012, the AUC issued its final decision confirming plans to implement a PBR in Alberta effective in January 2013. The decision accepted NERA's recommendations of a TFP growth of 0.96 percent applicable for both Alberta's electric and gas distributors. The decision extensively cited NERA's analysis on the AUC's behalf. The AUC accepted NERA's recommendation on every substantial point -- rejecting criticisms -- including: data sources and methods for a Canadian TFP growth study for distribution utilities; the critical distinctions between North American X-factors and those in the UK or Australia; the role of econometrics in X-factor work; how to deal with claims of "structural breaks;" and how to deal with legitimate issues of unusual or idiosyncratic capital requirements (i.e., "capital trackers").

The distribution companies affected by the decision are now proceeding with developing compliance plans for submission to the AUC. Now that NERA's contract with the AUC is over, one of those distributors has retained NERA to assist it in developing the novel "capital tracker" regime.