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 productivity. 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 ratemaking process.
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 AUC.
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 AUC.
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.