On March 25, 2009, the Alberta Utilities Commission (AUC)
approved an application by ENMAX Power Corporation (EPC) for
formula-based ratemaking (FBR) to be applied to EPC's regulated
electric distribution and transmission businesses. This is the
first time that an FBR plan has been approved for an electric
utility in Alberta. Unlike traditional cost-of-service ratemaking,
the FBR plan approved by the AUC establishes a formula that
provides incentives to EPC to increase its productivity and become
more efficient. The formula includes factors for inflation and
The starting point for the FBR plan is EPC's 2006 approved
distribution and transmission rates, subject to some adjustments,
which were established through the traditional cost-of-service
The AUC approved the FBR plan for a five-year term and allowed
for an additional two years, given that at the time of the
AUC's decision, two years had already elapsed. The AUC
recognized that the longer the term, the stronger the incentives
for efficiency improvements. Under the circumstances, the AUC found
that the approved term, from January 1, 2007 to December 31, 2013,
would provide significant efficiency incentives and benefit both
EPC and its customers. The AUC noted that the longer term would
also reduce the regulatory burden for EPC, its customers and the
The FBR plan also contains various mechanisms intended to
protect ratepayers. One of these is an earnings-sharing mechanism,
whereby earnings over and above a certain threshold are to be
shared equally between EPC and its ratepayers by way of a reduction
in future rates. The approved earnings-sharing mechanism is
"asymmetrical" in that customers share in earnings above
the target return on equity, but have no corresponding risk if
EPC's earnings are below target.
Quality-of-service performance standards are also part of the
FBR plan. If EPC fails to meet its proposed performance standards,
it will be faced with up to $2,000,000 in financial penalties.
The FBR plan also includes re-openers and off-ramps that allow
for the occurrence of extrinsic events beyond the control of EPC
and that protect against the impact those events may have on EPC.
Changes or re-openers to the FBR plan must be approved by the
The FBR plan is intended to provide EPC with incentives that
more closely mimic the incentives found in the competitive market
is expected to result in benefits for both EPC and its customers
that could not be achieved under the traditional cost-of-service
approach to ratemaking.
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The Government of Alberta recently announced a number of policy changes that will impact the Alberta Electricity Market, composed of its generators, transmitters, distributors, retailers, electricity consumers and wholesale electricity market.
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