STANDARD QUESTIONS

1. Tell us about the organization you lead, its current structure/composition, size, key initiatives and range of work? 

Answer: The AUC regulates investor-owned electric, natural gas and water utilities, and certain municipally owned electric utilities. The AUC is also responsible for making timely decisions on the need, siting, construction, alteration, operation and decommissioning of natural gas and electric transmission facilities. The AUC regulates power plants in a similar fashion except the need for new power plants is determined by market forces. The AUC develops and amends rules that support the orderly operation of the retail natural gas and electricity markets.

In carrying out its adjudicative functions, the Commission is a quasi-judicial tribunal. It makes its decisions after hearing an application. It may also hear from affected customers, landowners or market participants. Its decisions are binding and are reviewable only by the Court of Appeal of Alberta on questions of law or jurisdiction. The AUC is also responsible for adjudication of Alberta Electric System Operator (AESO) rule-enforcement matters, and must review AESO rules to ensure they are in the public interest, support a fair, efficient and openly competitive market, and market participants were adequately involved in their development. In addition to adjudicating objections and complaints to new or existing independent system operator [AESO] rules, the AUC is charged with adjudicating objections and complaints to reliability standards. The AUC is also charged with adjudicating cases brought by the Market Surveillance  Administrator for contraventions of reliability standards, legislation, regulations and AUC decisions.

The AUC’s governance structure  is  based on a unitary model delivered through a committee approach. Relevant committees include the audit and finance committee, the executive advisory committee, the risk and opportunity committee and the chair’s management committee Consistent with a unitary model, the Commission, through the chair’s management committee, and the executive work together to set strategic direction, operational plans and the budget. Day-to-day operational management resides with the executive.

AUC Commission members are full-time appointees. The Commission’s adjudicative function is delivered through individual panels assigned by the chair.

The AUC has 125 employees split between Calgary and Edmonton offices.

A few key initiatives include having:

• Introduced performance-based regulation to apply competitive, market-like pressures to the distribution companies, replacing cost-of-service regulation, which provides little or no incentive to reduce costs.
• Launched a distribution system inquiry in order to understand the technology-induced changes confronting Alberta’s electricity and natural gas distribution systems, and the potential regulatory implications.
• Established a technology and innovation group within the AUC’s rates division to focus more attention on technology in our work; to better understand technologies that are being advanced and proposed for deployment, together with the market and rate implications of their deployment.
• Adopted new focus within the AUC’s facilities division to strengthen and enhance the economic analysis of facility projects using non-market valuation and other economics-based assessment tools.
• Established a capacity  market group to bring together experts in economics, markets and law to support the Commission’s new role in the implementation of the capacity market, transitioning from an energy-only market.

2. Though similar in their roles the many energy regulatory boards and tribunals across Canada have particular mandates and responsibilities. What do you see as the unique elements of your Organization/ Board/Tribunal’s mission/legislative mandate and circumstances? 

Answer: The origin of a unique and enduring element of the AUC’s mandate dates back to 1948 when Albertans were asked, by means of a provincial plebiscite, whether utilities should be publicly or privately owned and operated. By the narrowest of margins Albertans voted for utilities to remain privately operated.

Alberta has consistently embraced private-sector investment and involvement in the delivery of public utility service, and this approach has shaped the evolution of the AUC’s predecessors as well as the AUC today. Alberta’s utilities sector is largely private sector, and is influenced by market forces perhaps more than in many other jurisdictions. The AUC’s foundational vision refers to its mandate to protect the interests of Alberta, specifically where competitive market forces do not.

Not surprisingly perhaps, the AUC has a specific legislative mandate in market oversight, FEOC (fair, efficient and openly competitive) market considerations and the legislative mandate to back up enforcement in these areas, such as the recent fine of about $56 million imposed on a violator of market rules.

The impact of market considerations is also apparent in recent AUC initiatives, such as its recently launched distribution inquiry, where  a key consideration arising from the potential impacts of rapidly advancing technologies will be which of the new technologies and services should be competitively provided and what functionality of incumbent monopoly providers should be made available to new entrants.

Private sector aspects and considerations such as emerging competition also make it imperative that the AUC develop unique expertise to address such challenges. Assessing the impact of technology on utility business models and rate structures will require new skills, such as the potential adoption of non-market valuations and other economics-based assessment tools. We are moving quickly to expand our knowledge and expertise in these areas.

3. Economic regulation of energy is at the centre of various public policy considerations (economic, environment, social, political). Where do you see the biggest regulatory and legislative challenges for your organization over the coming decade? 

Answer: For the Alberta Utilities Commission, the largest regulatory and legislative challenges over the next decade will almost certainly result from the emerging market changes that are being fueled by technological innovation, shifting and evolving consumer tastes, and societal expectations around the impact and delivery of public utility services. Alberta’s utility industry is clearly changing and the AUC is already exploring how to manage those changes. In some ways, the AUC’s situation is unique, in that it oversees a utility sector dominated by investor owned companies. As a result, the pace and nature of market changes occasioned by the many factors driving Alberta’s utility sector may be unique, relative to other jurisdictions. In our notably dynamic public utility sector, with new consumer demands and the emergence of new services, the key questions are when is regulation necessary, and what form should it take.

QUESTIONS ON RECENT TRENDS

1. Focusing on environmental considerations, and specifically Greenhouse Gas Emissions, can you expand on how these factor into your regulatory approach and/or processes? 

Answer: For the Alberta Utilities Commission, environmental considerations are one a of trinity of perspectives the Commission must by law consider in determining whether a project is in the public interest, along with assessing economic and social impacts. So in a broad sense, environmental considerations have been at the centre of how we examine applications for generation and transmission infrastructure.

Specific to greenhouse gasses such as carbon dioxide, the AUC’s regulatory authority, rules and project scrutiny dovetails with other provincial legislative requirements, such as the Specified Gas Emitters Regulation of the Climate Change and Emissions Management Act (that act was Canada’s first carbon dioxide reduction legislation put in place in 2007 and strengthened in 2017). For example, under AUC Rule 007, applications for thermal (essentially coal- or natural gas-fired) generating plants must include applications to Alberta Environment and Parks under the Environmental Protection and Enhancement Act (also, wildlife protection and management measures), and reporting on the results including proposed mitigation measures. The rule also requires, separately, that applicants provide an environmental evaluation, that must include air quality. If the plant requires a federal or provincial approval, that approval must be included. And lastly it requires a statement of emission rates, whether those rates meet the Alberta Air Emission Standards for Electricity Generation and any other applicable standards or guidelines, and whether the plant will comply with the Alberta Ambient Air Quality Objectives and Guidelines (AAQOG). In addition, for natural gas pipeline projects, applicants must demonstrate they meet the AAQOG.

With these requirements, it is essential to have the adequate institutional expertise to develop, apply and maintain or upgrade the existing standards, but also to understand the science and engineering. So at both the Commission level and among AUC staff, our personnel include environmental and engineering specialists up to and including the doctoral level. In our facilities division, we have a dedicated group focused on technical assessment including environment, engineering, economics, and noise.

2. We see movement by various economic regulatory bodies, aimed at modernizing regulatory tests/formulas and remuneration models (one such move has been to equalize the treatment of capex and opex in terms of investments in cloud services). What are your views on existing economic regulation as it pertains to new and emerging technologies, innovation, and investment models? 

Answer: Great question. Very timely, and very relevant to the Alberta Utilities Commission. One of the key underlying principles in how the AUC approaches regulation is to deliver innovative and efficient regulatory solutions for Alberta. Another is that we regulate to protect social, economic and environmental interests of Alberta where competitive market forces do not. So, institutionally the AUC has a goal of constant modernization and, where possible, a desire for economically efficient regulation.

Over the past 10 years there have been several examples of where the AUC has modernized its economic tests, formulas and approaches. Not long after it was launched in 2008, the Commission chose to move away from the legacy formula-based approach to setting the cost of capital for utilities. It was uncertain economic times and the change allowed greater breadth and depth of scrutiny. Going forward, the AUC is considering returning to  a formula-based model, reflecting a steadier economic outlook, and to both simplify  and reduce the cost of the process. It would reduce regulatory burden, which is ultimately borne by ratepayers. For Alberta’s distribution utilities, starting in 2013 the AUC put in place formula-based or performance-based regulation as an alternative to cost of service. The AUC’s approach has been sharpened since, to improve regulatory efficiency and enhance the utility cost-control benefits. In our view, it is important to adjust along the way.

In terms of applying existing economic regulation in the face of new and emerging technologies, innovations and investment models, regulatory history shows that changes in the regulatory environment may  demand or require changes to the regulatory approach, in order to best serve the public interest. This understanding is a central part of the rationale for the AUC’s current distribution inquiry, which includes both electricity and natural gas. Among the questions it seeks to answer are: 

• Where alternative approaches to providing electrical service develop, how will the incumbent electric distribution utilities be expected to respond and what services should be subject to regulation?
• How should the rate structures of the electric distribution facility owners be modified to ensure that price signals encourage electric distribution facility owners, consumers, producers, prosumers and alternative technology providers to use the grid and related resources in an efficient and cost-effective way?

3. Is there an opportunity for utilities, now and in the future, to work collaboratively to respond to market needs/demands (e.g., natural gas utility partnering with electric system operators on power to gas to balance renewable electricity using the gas grid as storage)? 

Answer: Yes. If there are adequate returns to be made or likely to be made, it is almost inevitable that utilities (old and new) will move towards those kinds of opportunities. Collaborative models may be preferred to mitigate both development risk and project risk. One would certainly hope and expect that utilities and potentially new market entrants would develop offerings to respond to market demands, either individually or collaboratively.

A central focus of the Alberta Utilities Commission’s self-initiated distribution inquiry, launched in December 2018, is the dynamics and implications – for companies, regulators and consumers – of unfolding shifts in the utility space fueled by technological change and changing societal tastes and expectations. “Understanding how this transition plays out, and ensuring effective management of change and its effects are central to the public interest mandate of the Alberta Utilities Commission,” AUC Chair Mark Kolesar said in launching the inquiry.

From a potential collaboration standpoint, in Alberta we have certainly seen collaboration among existing utilities partnering with other firms for certain projects, such as proposed large transmission projects. We have also seen  a legacy firm joint venture with an emerging technology company and then move to control the profitable new business once it was established. Obviously, there are and would almost certainly be regulatory implications. In  Alberta’s privately-owned public utility model, utility providers including generators, must get certain approvals from the AUC, which applies a public interest lens. Both new ventures from existing regulated utilities (joint ventures or otherwise) and new entrants (joint venture or otherwise) would likely attract or demand under Alberta law the scrutiny of the regulator. What that scrutiny should be and how it would be applied is also among the topics being explored in the AUC Distribution Inquiry.

4. Ratepayers bear the cost of regulation. What controls do you use to ensure the ratepayer is receiving value commensurate with the costs incurred? Do you use any performance metrics or otherwise participate in any processes (e.g. benchmarking) to evaluate regulator performance? 

Answer: Pursuing efficiency in its own operations and encouraging efficiency in the utilities it regulates is a central goal of the Alberta Utilities Commission. Given this focus, since its inception in 2008 it has reduced the average regulatory cost per Alberta ratepayer by more than 20 per cent.

Efficiency, in the narrow internal sense, means the AUC continually examines processes to ensure waste, cycle time and duplication are minimized, that decision-making processes are clear and designed to eliminate unnecessary applications and delays. Information required is limited to what the AUC requires to carry out its legislated responsibilities. Efficiency also requires staff to have the requisite expertise and technical knowledge.

Very briefly some measures of AUC regulatory efficiency are:

• Average number of days to process a case, application or complaint.

  The AUC introduced shorter application cycles and reduced regulatory burden through the elimination of routine, low-risk  applications. As a result, 50 per cent  of  facility  applications are processed within  20  days,  and 76 per cent within 60 days. The AUC has streamlined or eliminated numerous routine, low-risk applications, and worked with the Alberta Electric System Operator and industry to exempt certain types of needs identification documents for new transmission facilities.

• Frequency of cases successfully appealed.

  Since 2008, the AUC has issued more than 6,600 decisions, which by law can be appealed to the Court of Appeal of Alberta. The Court of Appeal of Alberta has upheld all AUC decisions brought before it as reasonable, fair and within the AUC’s competence to decide. Appeals to the Supreme Court of Canada asking to overturn court of appeal decisions have all been equally unsuccessful.

• Cost of regulation objectively measured and tracked.

  Despite significant increases in the value of the sector the AUC regulates, the number of AUC proceedings, consumer sites, oral hearing days, and Alberta inflation, the cost of regulation to the average ratepayer has declined by more than 20 per cent since 2008 and the AUC budget is slightly less today than in its first year of operation.

• A financially healthy utilities sector, with strong credit ratings that minimize utility debt costs, resulting in lower ratepayer costs.

  The value of the sector regulated by  the AUC is close to $31 billion (rate base plus wholesale electricity market transaction value) with an annual cumulative revenue requirement of more than $5 billion, and it serves close to three million consumer sites. All of these figures have shown steady growth. All of the utilities enjoy strong credit ratings and good profitability, largely without significant rate increases.
  Lack of duplication or overlap with other government agencies and departments.
  The AUC has worked with other departments and agencies to coordinate and streamline its processes in situations where applications to the AUC also require approvals from other agencies and departments.

The AUC conducts an annual stakeholder review of the utility industry, industry and consumer groups, government, and regulatory lawyers to rate us on a number  of areas, related to how it interacts with them, on processes and the quality of AUC decisions. It also conducts more specific surveys of landowners at information sessions shortly after facility applications are made, and a follow up survey immediately after the hearing. The AUC uses this information to improve its own processes and often identifies specific utility concerns, addresses them formally and makes changes before the next year’s survey. Eight in 10 respondents feel the AUC runs efficient processes.