This is an application made by Maritime
Electric Company, Limited (the "Applicant", "Maritime Electric" or the "Company") pursuant to the
Electric Power Act,
R.S.P.E.I. 1988, Cap. E-4 ("EPA")
seeking, among other things, an order of the Island Regulatory and Appeals
Commission (the "Commission") approving amendments to the rates, tolls
and charges for electric service for the three-year period from March 1,
2016 to February 28, 2019.
 The Application was filed pursuant to Section 20(1)
which reads as follows:
Variation of rates, submission for review and
20. (1) Whenever any public utility wishes to vary
any existing rates, tolls or charges, or to establish any new rates,
tolls or charges for any service, it shall submit for the review and
approval of the Commission a schedule of such proposed rates, tolls and
charges together with and appended thereto all rules and regulations
which, in any manner, relate to the rates, tolls and charges; the
Commission may approve, after reviewing the schedule and rules and
regulations submitted, the schedule of rates, tolls and charges and the
rules and regulations either in whole or in part, or may determine and
fix new rates, tolls and charges, and amend the rules and regulations,
as it sees fit.
 Maritime Electric filed a general rate application
with the Commission on October 28th, 2015.
In its initial filing, Maritime Electric sought, among other
things, a return on average common equity of 9.7% within an allowed
range of 9.5% to 9.9%, and an electricity rate increase equivalent to
2.5% for the typical rural residential customer.
The initial filing sought to set rates, tolls and charges for
electric service for the one-year period from March 1, 2016 to February
 In January 2016, Maritime Electric filed with the
Commission an agreement between Maritime Electric and the Government of
Prince Edward Island (the "Agreement").
The Agreement addressed or agreed to amend certain matters raised
in Maritime Electric's general rate application and in a related
application dealing with rates of depreciation.
 As a result of the Agreement, Maritime Electric
filed amendments to its general rate application on February 5th, 2016.
As part of its amended filing, Maritime Electric proposed to set
rates, tolls and charges for electric service over the three-year period
from March 1, 2016 to February 28, 2019.
The Company sought, among other things, a return on average
common equity of 9.35% and an annual increase in electricity rates
equivalent to 2.3% for the typical customer, effective March 1 in each
of 2016, 2017 and 2018.
 A public hearing was held on February 25, 2016 to
consider the proposed amendments to electricity rates and other related
matters. On February 29,
2016, the Commission issued Order
UE16-04, and advised that detailed
reasons for the Order would follow in due course.
 Following are the detailed reasons in support of
of Public Utilities in P.E.I.
 The Applicant, Maritime Electric, owns and operates
a fully integrated system providing for the purchase, generation,
transmission, distribution and sale of electricity throughout Prince
Edward Island. The
Company's head office is located in Charlottetown with generating
facilities in Charlottetown and Borden-Carleton.
The Company has contractual entitlement to capacity and energy
from NB Power's Point Lepreau nuclear generating station and an
agreement for the purchase of capacity and system energy from NB Power
delivered via two submarine cables.
The cables are leased from the Province of Prince Edward Island.
The Company also purchases 92.5 MW of wind powered energy under
contract with the PEI Energy Corporation.
 Maritime Electric is a "public utility" as defined
and, as such, is subject to regulatory oversight by the
Commission's jurisdiction to regulate public utilities is founded in
Island Regulatory and Appeals Commission Act,
R.S.P.E.I. 1988, Cap. I-11 (the "IRAC Act").
 Since the Commission was first created in 1991, its
jurisdiction to regulate public utilities under the
has been in an
ongoing state of change. In
1994, the Government introduced a price cap on electricity rates
equivalent to New Brunswick rates plus 10%.
While the price cap was in effect, the Commission was authorized
to "monitor" but not "regulate" utilities.
In 2004, the legislation reverted to full cost of service
regulation, requiring the Commission's approval for any changes to the
rates, tolls and charges for electricity.
Cost of service regulation remained in effect until 2010, when
the Government, through amendments to the
EPA, introduced legislatively
fixed electricity rates as part of the PEI Energy Accord (the "Energy
Accord"). The Energy Accord
continued for a five-year period, from March 1, 2011 to February 29,
2016. As a result of the
expiration of the Energy Accord, the Commission was required to set the
rates, tolls and charges for electricity effective March 1, 2016.
 In accordance with the
EPA, Maritime Electric has a
monopoly to provide electric service in the Province of PEI.
Section 2.1(1) of the
states that "No person other than
Maritime Electric Company, Limited shall provide service in the
province, or in a part of the province".
The only exception to this monopoly are those customers served by
the City of Summerside's electric utility.
 Regulatory oversight is of increased importance
when dealing with a monopoly, such as Maritime Electric's, due to a lack
of competition and natural market forces.
However, the financial benefits associated with a monopoly must
be balanced against the onerous requirements imposed on Maritime
Electric to provide "reasonably safe and adequate" electric service, at
all times and to all parts of the Province.
This is not without challenges, risk and expense for the Company.
 The Commission is required, in accordance with the
EPA, to set rates, tolls and charges for electric service that are
"reasonable, publicly justifiable, and non-discriminatory".
In doing so, the Commission must balance the interests of
ratepayers and the interests of the utility.
This duty was explained by the Supreme Court of Canada in the
leading case of Northwestern Utilities, Limited v. The City of Edmonton
and Board of Public Utility Commissioners of Alberta,  SCC 186
The duty of the Board was 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.
 In 2015, Maritime Electric filed with
the Commission five separate applications pursuant to the
These applications generally dealt with the following matters:
Approval of a proposed energy efficiency and demand
side management ("DSM") plan (Commission Docket UE21406) ("DSM
Approval of proposed expenditures to design,
construct and commission a 50 MW combustion turbine generator
(Commission Docket UE20723) ("CT4 Application");
Approval of proposed amendments to the rates of
depreciation for several classes of property beginning January 1, 2016
(Commission Docket UE21603) ("Depreciation Rate Application");
Approval of proposed amendments to the rates, tolls
and charges for electric service for the period beginning March 1, 2016
(Commission Docket UE20942) ("General Rate Application"); and
Approval of a proposed annual capital budget for
2016 (Commission Docket UE20724) ("Capital Budget").
 The Commission provided public notice of each
application and allowed for the involvement of the public, including in
the exchange of interrogatories.
All filings in respect of the above noted applications were made
available to the public and can be viewed on the Commission's website.
 On November 3, 2015, the Commission issued Order
UE15-01 approving the Capital Budget as filed.
 Also on November 3, 2015, the Commission issued
UE15-02 with respect to the DSM Application.
The Commission refused to accept the majority of the DSM plan as
filed by Maritime Electric, approving only the public outreach and
education components. The
Commission has since engaged the services of expert consultants with
respect to DSM and a report is forthcoming.
The Commission expects that Maritime Electric and the Government
will work together to develop a DSM plan that is consistent with, and
complimentary to, the Provincial Energy Strategy that is currently being
developed by the Government.
A further order will be issued with respect to the DSM
Application in due course.
 On January 29, 2016, the Commission issued Order
UE16-02 accepting Maritime Electric's withdrawal of the CT4 Application,
subject to certain conditions.
The Order was issued in response to a letter and supporting
document filed by Maritime Electric advising that the Company has the
ability to procure access to 50 MW of firm capacity and requesting that
the CT4 Application be withdrawn accordingly.
 The General Rate Application was initially filed
with the Commission on October 28, 2015.
The Commission issued a Notice of Application that provided an
overview of the proposed amendments to the rates, tolls and charges for
electric service being sought by Maritime Electric and also provided
information on how the public could view, comment and ask questions with
respect to the application.
 In response to the initial filing in the General
Rate Application, Mr. Roger King issued interrogatories to Maritime
Electric and received responses.
No other public comment was received with respect to the initial
filing. The Government of
Prince Edward Island did not participate in the interrogatory process
and did not seek formal intervener status at the time of the initial
 On January 29, 2016, Maritime Electric filed the
Agreement with the Commission.
The Agreement addressed the matters raised in the General Rate
Application and the Depreciation Rate Application, as well as other
matters relating to electric service in the Province.
 Upon receipt of the Agreement, the Commission
issued Procedural Order
The Procedural Order directed that the General Rate Application
and the Depreciation Rate Application would be consolidated into a
single matter in Commission Docket UE20942 and heard together at a
public hearing. The
Procedural Order further directed that the public hearing would commence
at 9:30 a.m. on February 25, 2016, and set certain timelines for
submissions by the parties, interveners and the public.
 Also on January 29, 2016, the Commission issued a
Notice of Public Hearing.
The Notice provided information regarding the Agreement, including the
key terms, how the Agreement could be viewed, how the public could
participate or provide comments, as well as the date, time and location
of the public hearing. The
Notice was published on the Commission's website and in local
 On February 1, 2016, the Government of Prince
Edward Island, as represented by the Minister of Transportation,
Infrastructure and Energy, sought formal intervener status in the
application. On February
16, 2016, the Commission also received a request for intervener status
from the Environmental Coalition of Prince Edward Island Ltd.
("ECOPEI"). However, upon
further inquiry, ECOPEI advised the Commission that it did not intend to
call evidence at the hearing, but instead requested only the opportunity
to ask questions of witnesses called on behalf of Maritime Electric
and/or the Government.
 On February 19, 2016, the Commission issued
In accordance with the Procedural Order, the Government was granted
formal intervener status in the application.
ECOPEI was not granted intervener status, but was permitted to
participate in the manner requested, including the questioning of
witnesses called on behalf of Maritime Electric and/or the Government.
 The Commission also received comments via email
from Mr. Tom Courtney, a resident of PEI who opposed the proposed
increase in electricity rates.
No other written comments were received from the public.
 Members of the public were also invited to make
oral submissions at the public hearing.
Although individuals seeking to make oral submissions were
required to register with the Commission in advance of the hearing, no
individuals registered. At
the commencement of the hearing, the Honourable Jamie Fox, Interim
Leader of the Official Opposition, requested the opportunity to make
submissions. This request
was granted by the Commission.
No other oral submissions were made by members of the public.
Commission Approach to Settlement Agreements
 The Commission notes at the outset that it is not a
party to the Agreement and does not consider itself to be, in any way,
bound by the terms of the Agreement.
The Commission's jurisdiction to regulate public utilities,
including Maritime Electric, is founded in the
Although the Agreement is evidence that certain matters are
supported by the Government, the Commission must still exercise its
jurisdiction to set rates, tolls and charges for electric service that
it determines to be reasonable, publicly justifiable, and
 Negotiated settlements, such as the Agreement, are
becoming increasingly more common in utility regulation across Canada,
particularly in Alberta and Nova Scotia.
The Commission views negotiated settlements favorably in the
context of utility regulation.
A negotiated settlement brings interested parties to the table,
giving consumers, industries and utilities a voice without the need for
a costly - and potentially intimidating - regulatory hearing.
Multi-year agreements, whenever possible, are to be encouraged as
allowing for rate stability and decreasing the cost of regulation - a
cost that is ultimately borne by ratepayers.
 Numerous regulators across Canada have legislation,
procedural rules and/or common law that govern the negotiated settlement
process. These rules, such
as those developed by the Alberta Utilities Commission ("AUC"), provide
a procedural framework from the initiation of the negotiated settlement
process to the approval by the regulator.
The AUC rules, for example, address issues such as notice to
interested parties, the disclosure of relevant information, and the
evidence that must be filed in support of an application to approve a
 Despite being common in other jurisdictions, this
is the first time the Commission has been presented with a negotiated
settlement in the context of utility regulation.
As a result, the Commission does not currently have the benefit
of legislation or procedural rules to assist in the consideration of the
Agreement. Instead, the
Commission, with the approval of the parties, has adopted the following
principles set forth by the Nova Scotia Utility and Review Board
("NSUARB") and the Alberta Court of Appeal.
 Once the interested parties reach a negotiated
settlement, the agreement is not simply approved by "rubber stamp" of
the regulator. Instead, a
regulator presented with a negotiated settlement is required to
determine if the agreement is in the public interest (see Nova Scotia
Power Inc. (Re), 2012 NSUARB 227 at para. 24).
A settlement agreement does not replace an "appropriate and
informed review by the Board as to what is in the overall public
interest" (see ATCO Electric Ltd. v. Alberta (Energy and Utilities
Board), 2004 ABCA 215 [ATCO] at para. 139).
 Although the "public interest" in the rate-setting
context traditionally requires a balance between the interests of the
utility and the interests of ratepayers, this will not always be the
case when considering a negotiated settlement.
 When a regulator is presented with a "package deal"
negotiated settlement agreed to by a utility, and the agreement is
approved by the regulator in its entirety, the public interest to be
considered is that of the consuming public generally; the regulator is
under no obligation to consider the utility's economic interests.
If the regulator alters, or proposes to alter, the terms and
conditions of a negotiated settlement, then the regulator's
consideration of the public interest will include both the interests of
the consuming public and the economic interests of the utility (see ATCO
at para. 140-143).
 Although the Commission has adopted these
principles in the context of the present application, it fully intends
to work with all interested parties to develop and implement procedural
rules governing the negotiated settlement process for future
Commission is particularly interested in ensuring that all interested
parties are represented at the negotiating table.
It is noteworthy that other jurisdictions have a consumer
advocate appointed to represent certain interests, most notably that of
the residential consumer.
The Commission recognizes the value of a consumer advocate, in some
form, and expects the Government and Maritime Electric to present
options to the Commission as to how to best represent these interests in
the event of future negotiated settlements.
the Application and the Agreement
 On January 29, 2016,
Maritime Electric filed with the Commission the Agreement as between the
Company and the Government.
The Agreement, dated January 28, 2016, was executed by Fred J. O'Brien,
President and Chief Executive Officer of Maritime Electric, and the
Honourable Paula J. Biggar, Minister of Transportation, Infrastructure
 Also on
January 29, 2016, Maritime Electric filed Minutes of Settlement with the
Commission. In accordance
with the Minutes, the parties acknowledged that the Agreement differed
from the relief sought in Maritime Electric's initial filing.
In so far as there were any differences, the parties requested
that the terms of the Agreement would prevail.
Maritime Electric and the Government jointly requested that the
Agreement be approved and that the Commission set new electricity rates
effective March 1, 2016 on the basis of the Agreement.
review of the Agreement, the Commission determined that it differed, in
many respects, from the initial filing of Maritime Electric in support
of its General Rate Application.
As a result, the Commission ordered Maritime Electric to file an
amended application with the Commission.
The purpose of requesting the amended application was to provide
support and validation for certain matters agreed to by Maritime
Electric and the Government, particularly where the Agreement differed
from Maritime Electric's initial request for relief.
Electric filed its amended application with the Commission on February
5, 2016.The amended application included the following reconciliation
and comparison between the relief sought in the initial application
versus the relief sought in the Agreement:
1, 2016 - February 28, 2017)
1, 2016 - February 28, 2019)
Return on Average
Common Equity - 2016
9.70% for setting
revenue requirement within an allowed range of 9.50% to 9.90%
2016 - 40.5%
2016 - 40.9%
2017 - 40.0%
2018 - 40.0%
Financing Costs -
2.3% per year
Rate of Return
Adjustment (RORA) Refund Period
receipt of the Agreement and the amended application, the Commission
issued interrogatories to both Maritime Electric and the Government.
Responses to all interrogatories were received in advance of the
public hearing and made available on the Commission's website.
Commission has made the following findings based on the evidence as
presented by the interested parties and members of the public.
Rates, Tolls & Charges
Proposed Rate Increase
 In its initial filing, Maritime Electric sought a
one-year increase in electricity rates equivalent to a 2.5% increase for
the typical rural residential customer consuming an average of 650
kWh/month. The actual level
of consumption by a customer would determine if the increase in
electricity costs would be more or less than the typical customer.
The rate increase, if approved by the Commission, would be in
effect for a one-year period from March 1, 2016 to February 28, 2017.
The rates initially proposed by Maritime Electric for each class
of customers are set out in Schedule 16-1 to the initial filing.
 In its amended filing, Maritime Electric proposed
to set electricity rates for a three-year period from March 1, 2016 to
February 28, 2019. The
Company requested an annual increase of 2.3% for the typical electric
customer in each class. The
impact on annual electricity costs would vary from customer to customer
based on their actual electricity consumption.
The increases, if approved, would come into effect annually on
March 1, 2016, March 1, 2017, and March 1, 2018.
Cost Allocation & Rate Structure
 Maritime Electric filed, as part of its initial
filing, a cost allocation study prepared by Chymko Consulting Ltd. at
the request of Maritime Electric (the "2014 Cost Allocation Study").
The 2014 Cost Allocation Study was based on Maritime Electric's
statement of earnings for the twelve months ending December 31, 2014.
 A significant component of cost allocation and rate
structure in this Province is the continued use of the "residential
second block". The
residential second block offers a reduced rate per kWh for residential
customers who consume in excess of 2,000 kWh per month.
The residential second block not only encourages energy
consumption, the evidence filed discloses that it results in the
residential rate class paying less than the actual cost to provide
service to that class.
 The cost of providing service to the various
classes of customers is measured by using a revenue-to-cost ("RTC")
ratio. A RTC ratio below
100% indicates that revenue for that rate class should be increased,
while a RTC ratio above 100% indicates that revenue for that rate class
should be decreased.
Maritime Electric views a RTC range of 90/110 as an acceptable range for
the Company's rate classes.
 The 2014 Cost Allocation Study (like cost
allocation studies in the past) confirmed the existence of
disproportionate RTC ratios in Maritime Electric's current rate
structure. While the RTC
ratio for the residential rate classes (excluding seasonal and farm
customers) was 92%, the RTC ratio for the general service rate class was
in excess of 110%. In
simplified terms, the RTC ratios suggest that the general service rate
class is subsidizing residential consumers.
 For these reasons, Maritime Electric initially
proposed to increase the residential second block from 2,000 kWh per
month to 3,000 kWh effective March 1, 2016, then to 3,800 kWh effective
March 1, 2017, and finally to 5,000 kWh effective March 1, 2018.
According to Maritime Electric's evidence, a 5,000 kWh per month
threshold was an appropriate threshold to capture the large majority of
the highest consumption residential electricity consumers (with
dwellings). The estimated
$773,000 of incremental residential rate class revenue generated by the
proposed change over the three-year transition period would be used to
lower electricity costs for general service customers.
 As part of its amended filing, Maritime Electric
sought to defer any changes to the residential second block.
Instead, Maritime Electric proposed consulting with stakeholders
and undertaking a rate design study to determine the appropriate class
for all or some farms, and filing an updated cost allocation study using
2017 financial data.
 The deferral of changes to the residential second
block was supported by the Government.
The Government presented evidence that it is developing a new
Provincial Energy Strategy, the results of which could lead to new
policy direction on electricity supply and/or usage.
The Government also noted that changes to the second block rate
could have a significant financial impact on certain consumers.
It submitted that consultation should occur with affected
consumers prior to implementing any changes, and suggested that there
may be opportunities to mitigate the financial burden through programs
resulting from the Provincial Energy Strategy and DSM.
 In response to the Commission's interrogatories,
both Maritime Electric and the Government confirmed that they were not
aware of any other jurisdiction in North America that utilizes a
discounted pricing structure in the residential rate class.
 Also on the issue of cost allocation, Maritime
Electric proposed the preparation of a cost allocation classification
study with respect to Point Lepreau.
The Point Lepreau nuclear generating facility is a base load
facility with substantially all costs as fixed long term facility costs,
with relatively minor fuel costs.
In the 2014 Cost Allocation Study, the annual fixed costs
incurred under the Point Lepreau participation agreement are classified
as all demand related, with a minor fuel cost component classified as
energy. Maritime Electric
proposes to undertake a detailed review and analysis of the Point
Lepreau costs to determine the most appropriate methodology to be
employed in future cost allocation studies to classify the annual fixed
costs as between demand and energy.
Proposed Rate Increase
 The Commission encourages multi-year rate setting,
whenever possible, so as to allow for stable and predictable electricity
rates for consumers.
Multi-year rate setting also reduces the utility's regulatory costs -
costs that are ultimately borne by the consumer.
 The Commission accepts as reasonable the proposed
annual increase in electricity rates of 2.3% during the three-year
period from March 1, 2016 to February 28, 2019.
In accordance with section 20 of the EPA, Maritime Electric shall
charge the rates, tolls and charges for electric service as set out in
Appendix 1 hereto for the period from March 1, 2016 to February 28,
 The rates, tolls and charges in Appendix 1 are
based upon the forecast values and input values set forth in Appendix 2
hereto. In response to the
Commission's interrogatory, Maritime Electric advised that the schedule
of inputs in Appendix 2 is based upon actual results to December 31,
2015 and management's best estimates for 2016 to 2018.
Both Maritime Electric and the Government confirmed that they are
not aware of any information that would suggest that the inputs in
Appendix 2 are now inaccurate or will differ in any material way from
the projections contained therein.
 Both Maritime Electric, as applicant, and the
Government, as intervener, shall notify the Commission, in a timely
manner, of any material change to any of the inputs set forth in
Appendix 2. Maritime
Electric shall also file with the Commission, on or before February 28
in each of 2017, 2018 and 2019, the actual values associated with each
of the inputs set forth in Appendix 2, based on the Company's actual
financial results for the preceding year.
Cost Allocation & Rate Structure
 The Commission accepts the proposed deferral of
changes to the residential second block pending completion of the
Provincial Energy Strategy and the DSM plan.
The deferral is intended to allow for consultation with impacted
consumers and to explore opportunities to mitigate the financial burden
through programs resulting from the Provincial Energy Strategy and DSM.
 However, the Commission has, on numerous occasions,
expressed concerns with the continued existence of the residential
second block (see, for example, Commission Order UE10-03).
The residential second block is not based on cost of service; in
effect, it is a method to subsidize electricity costs for certain
classes of consumers, most notably farm operations.
For this reason, the elimination of second block has historically
been opposed by the farming community and by the governments of the day.
Examples of this opposition are clearly seen in Commission Order
 The Commission views the continued existence of the
residential second block as being contrary to the principles behind the
EPA, which directs that the rates, tolls and charges for electric power
should be reasonable, publicly justifiable and non-discriminatory.
The Commission fully expects that Maritime Electric and the
Government will work together over the next two years to develop a
proposed rate structure that is fair and non-discriminatory for all
ratepayers. Given the
evidence presented on this application regarding the cross-subsidization
of rate classes, the Commission is hereby putting Maritime Electric and
the Government on notice that any proposed continuation of the
residential second block rate in future rate applications will require
compelling evidence of its equity to ratepayers.
 Accordingly, Maritime Electric shall undertake a
rate design study to consider changes to the multi-block residential
energy pricing structure, and related changes to Maritime Electric's
other rate structures. The
rate design study and a proposed rate structure shall be filed with the
Commission on or before April 30, 2018.
Maritime Electric shall also file an updated cost allocation
study with the Commission on or before June 30, 2018, based on the
Company's financial results to December 31, 2017.
Finally, Maritime Electric shall prepare and file with the
Commission a Point Lepreau cost allocation classification study on or
before April 30, 2017.
Return on Average Common Equity
 At common law, a regulated public utility is
entitled to earn a "fair return" on the capital invested in its
enterprise. As explained by
the Supreme Court of Canada in Northwestern Utilities:
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
EPA codifies this common law principle in
section 24, which states that a public utility is entitled to earn an
annual return on its investment that is "just and reasonable":
24. (1) Every public utility shall be entitled to
earn annually such return as the Commission considers just and
reasonable, computed by using the rate base as fixed and determined by
the Commission for each type of service furnished, rendered or supplied
by such public utility, and the return shall be in addition to the
expenses as the Commission may allow as reasonable and prudent and
properly chargeable to operating account, and to all just allowances
made by the Commission according to this Act and the rules and
regulations made by the Commission hereunder.
 It is the role of the Commission to determine the
return on average common equity ("ROE") that is just and reasonable in
 In its initial filing, Maritime Electric sought a
ROE of 9.7%, within an allowed range of 9.5% to 9.9%, for a one-year
period from March 1, 2016 to February 28, 2017.
The proposed ROE was based on a forecast average common equity of
40.5% for 2016. In support
of this position, Maritime Electric filed a report prepared by James M.
Coyne, Senior Vice President of Concentric Energy Advisors
("Concentric") at the request of Maritime Electric.
 Mr. Coyne concluded that Maritime Electric's
proposed ROE was consistent with the allowed ROE for other
investor-owned electric utilities across Canada, particularly those in
Atlantic Canada, given the relative risk of Maritime Electric to those
 The Concentric report identified a number of
business and financial risks unique to Maritime Electric, including:
greater risk associated with adverse economic
conditions due to Maritime Electric's small size;
weaker electric sales growth in coming years due to
macroeconomic and demographic trends;
greater operating risks associated with:
Maritime Electric's reliance on NB Power for a
large percentage of its energy supply;
the need for on-island generation assets as a
back-up in case of supply interruption;
weather-related service interruptions; and
additional operational and contractual complexities
associated with on-island wind generation facilities;
higher political/regulatory risk due to the
"active role of government, as demonstrated by past changes in
legislation as well as by the broad mandate of the PEI Energy
 Based on these and other factors, Mr. Coyne
concluded that "the business risk of Maritime Electric today is above
average and somewhat higher than its Canadian and U.S. peers".
 In its amended filing, Maritime Electric requested
a lesser ROE of 9.35% for the period March 1, 2016 to February 28, 2019,
based on average common equity of 40.9% in 2016 and 40% in 2017 and
2018. In support of this
amended ROE, the Government, as intervener, filed an independent report
prepared by Grant Thornton LLP at the request of the PEI Energy
 The Grant Thornton report confirmed that during the
period from 2010 to 2015, the ROEs approved by Canadian regulators had
decreased. In Nova Scotia,
the ROE decreased by 0.35% during this period, while the ROE in
Newfoundland decreased by 0.2%.
The proposed ROE for Maritime Electric, if approved, would result
in a decrease of 0.4% from the legislated ROE of 9.75% in place during
the Energy Accord.
 The proposed ROE of 9.35% was supported by the
Government. In response to
the Commission's interrogatory requesting rationalization for the
proposed ROE, the Government stated in part:
In rationalizing the agreed upon ROE, Government
recognized that past regulatory decisions allowed for a risk premium,
presumably for the purpose of protecting Maritime Electric's S&P
[Standard & Poor's] debt rating.
On this basis and in the interests of continued rate stability,
it was deemed prudent to reach agreement on an ROE reduction of 0.4
percent (for an allowed ROE of 9.35 percent).
This reduction is in the range of what has been seen in other
Canadian jurisdictions over the past five years.
 In response to the Commission's interrogatory,
Maritime Electric reiterated many of the factors identified by
Concentric as increasing the Company's overall risk profile relative to
other Atlantic Canadian electric utilities and comparable Canadian
utilities. Based on these
continuing risk factors, Maritime Electric submitted that a risk premium
of 25 to 50 basis points was just and reasonable.
 ECOPEI submitted that an ROE of 9.35% was
extremely high return on average common equity" and advocated for a more
modest ROE that was comparable to monopolies in other jurisdictions.
 The Commission accepts the proposed ROE of 9.35%
based on average common equity of 40.9% in 2016 and 40% in 2017 and
2018. The ROE shall be in
effect for the 2016, 2017 and 2018 calendar years, and thereafter until
varied by the Commission.
 An ROE of 9.35% represents a reduction of 0.4% from
the legislated ROE of 9.75% in effect during the Energy Accord.
A reduction of this magnitude is consistent with what has been
seen in other Canadian jurisdictions, including in Atlantic Canada, as
noted in the review undertaken by Grant Thornton.
 The Commission also accepts that a ROE risk premium
is appropriate due to the unique risk factors that exist in this
Province, as set out by Concentric and Maritime Electric.
The Commission recognizes, in particular, that Maritime Electric
faces incremental risk relative to other utilities due to the frequency
in which the regulatory framework in this Province has been changed over
the last twenty years. Such
changes may be perceived by investors as increasing the regulatory risk
of the Company, resulting in the need for a higher risk premium when
compared to similar utilities in other jurisdictions. The Commission
recognizes the Company's responsibilities for electricity supply which
are unique when compared to other Canadian distribution utilities. The
Commission is reluctant to assign a value to the risk premium, and views
this as an assessment to be conducted based on the circumstances as they
exist at the time of each rate application.
 The Commission accepts the Company's average rate
base set forth in Appendix 2 hereto for 2016, 2017 and 2018.
However, Maritime Electric shall file with the Commission, within
six months from the date of Commission Order UE16-04, confirmation of
its rate base, including details of all accounts comprising its rate
base. Maritime Electric
shall also file with the Commission, on or before February 28 in each of
2017, 2018 and 2019:
the audited rate of return on average rate base for
the previous fiscal year; and
the audited rate of return on average common equity
for the previous fiscal year.
Energy Cost Adjustment Mechanism ("ECAM")
 The Energy Cost Adjustment Mechanism ("ECAM") has
been in place in this Province since the early 1970s and is one
component of the amount charged to ratepayers for electric service.
The ECAM is intended to provide a smoothing effect to the
collection or rebate of costs.
It enables Maritime Electric to collect/return fluctuations in
approved energy related costs above/below the forecast base amount per
kWh included in the basic rates.
 Under the operation of the ECAM, Maritime Electric
charges to expense, on a monthly basis, an amount equal to the net
purchased and produced energy for the month, multiplied by a base rate
per kWh. This amount is
subtracted from the actual cost of energy purchased or produced during
the month, with the difference (positive or negative) added to the
Company's balance sheet for future recovery from, or return to,
customers over a period of time and as approved by the Commission.
 In its evidence, Maritime Electric noted
significant fluctuations in the ECAM Costs Recoverable From (Payable To)
Customers. These costs
varied from negative $5,061,928 in 2014, to a forecast $2,881,920 in
2015 and $1,532,952 in 2016.
Maritime Electric submits that these fluctuations are driven in
part by how the ECAM base rate was previously set, and in part by the
manner in which the rate charged to customers for ECAM was calculated.
 So as to reduce such fluctuations, Maritime
to reset the base rate at the forecast rate per kWh
for energy supply costs during the year for which revised customer rates
are sought; and
to modify the ECAM to reflect forecast energy
supply costs in customers' rates during the period in which they will be
 According to Maritime Electric's evidence, the
Energy Purchase Agreement between NB Power and Maritime Electric has
been extended for an additional three years, to February 28, 2019.
This extension allows the Company to reasonably estimate the
average unit cost of energy purchases for the three-year period, barring
any unplanned events (for example, unplanned outages at Point Lepreau or
curtailments in excess of forecast amounts).
In addition, NB Power has recently granted a one-year extension
of an existing capacity agreement and an incremental increase of 50 MW
of firm transmission service to PEI, reducing the risk of significant
 The Commission accepts as reasonable the modified
ECAM set forth in Appendix 3 hereto.
The modified ECAM shall apply to the approved basic rates for
meter readings taken on or after March 1, 2016.
 The Commission also accepts as reasonable the
following ECAM base rates per kWh:
March 1, 2016
March 1, 2017
March 1, 2018
ECAM Base Rate per kWh ($)
 The Commission accepts Maritime Electric's
submission that these changes to the ECAM will reduce the amount of
energy costs being deferred (collected) for future collection (return),
and will result in the timely collection of energy costs through basic
rates. Such results are
viewed favorably by the Commission as being in the public interest.
Rate of Return Adjustment ("RORA")
 The Rate of Return Adjustment ("RORA") account
represents over earnings by Maritime Electric, in excess of the allowed
return on average common equity, during the term of the Energy Accord.
In accordance with the legislated Accord, these excess earnings
are to be returned to customers, with interest, at the conclusion of the
 The RORA account was implemented by Commission
Order UE11-04 in December 2011, being the first year of the Energy
Accord. Maritime Electric
recognized that in the absence of regulatory adjustment, it would have
exceeded the allowed 9.75% return on average common equity.
 According to Maritime Electric's submissions, the
excess earnings were due to sales growth being higher than forecast when
developing the Accord. As a
result, Maritime Electric sought and received direction from the
Commission to establish a RORA account to defer amounts in excess of the
allowed return. In
accordance with Commission Order
UE11-04, the RORA account; also,
accrued interest at the Company's cost of short-term borrowing.
 On March 1, 2013, Maritime Electric began refunding
to customers the actual 2011 RORA and the forecast 2012 RORA at the rate
of $0.00071/kWh. This
refund rate is reflected in the rates legislated during the continuation
of the Energy Accord for the period from March 1, 2013 to February 29,
 Maritime Electric confirmed that it also recorded a
RORA in 2013, 2014 and 2015. The Company submits that the excess
earnings earned during the Energy Accord continuation were also due to
higher than forecast sales growth, driven primarily by the accelerated
adoption of electricity based sources for space heating.
 In its initial filing, Maritime Electric forecast
the balance of the RORA Account, to February 2016, to be $15,035,081.
It proposed to refund the RORA to customers over a two-year
period from March 1, 2016 to February 28, 2018.
The Company estimated a return of $6,384,400 (48%) of the RORA
balance between March 1, 2016 and February 28, 2017 by applying a credit
of $0.00533/kWh for each rate class.
The disposition of the balance of the RORA account would be
addressed in the Company's 2017 rate application.
 In its amended filing, Maritime Electric confirmed
the balance of the RORA account was $15,156,765 as of December 31, 2015.
It did not provide an updated forecast for January and February
2016. Maritime Electric
proposed that the balance of the RORA account be refunded over a
three-year period - rather than a two-year period - beginning March 1,
2016. The three-year period was proposed to smooth the impact on
customers' electricity rates over the term of the Agreement.
 The Commission accepts as reasonable the refund of
the balance of the RORA account to ratepayers over the three-year period
from March 1, 2016 to February 28, 2019.
In doing so, the term of repayment is consistent with the term of
 The Commission also accepts the following refund
rates per kWh as proposed by Maritime Electric:
March 1, 2016
March 1, 2017
March 1, 2018
RORA Rebate per kWh ($)
 However, the Commission does express concern about
the level of over earning by Maritime Electric during the term of the
Energy Accord. Although the
balance of the RORA account is now being refunded, it is being refunded
to present-day ratepayers, rather than to those ratepayers who
contributed to the excess earnings.
The Commission is of the view that over earnings must be
regulated more closely in the future to both limit the amount of over
earning and ensure a timely refund to ratepayers.
Maritime Electric is therefore ordered to file with the
Commission the monthly balance of the RORA account as part of its
monthly reporting requirements, and to further file the year-end balance
of the RORA account on or before February 28 in each of 2017, 2018 and
 The Commission also expresses concern over Article
4.1 of the Agreement entered into between Maritime Electric and the
Government. Article 4.1
uses the word "recover" when discussing the RORA account.
The Commission recognizes that, in the event of an over-refund
from the RORA account, Maritime Electric may seek Commission approval to
collect the amount of any such over-refund from ratepayers.
However, in the absence of an over-refund, Maritime Electric
shall not otherwise be entitled to recover any amounts from the RORA
account and shall specifically not be entitled to recover from the RORA
account in the event the Company does not attain a return on average
common equity of 9.35%.
Maritime Electric agrees with this finding and advises the Commission it
was not the intent of Article 4.1 to permit recovery from RORA for any
 Ideally for ratepayers, a public utility would
never over earn beyond its allowed rate of return.
However, the Commission recognizes that the inputs prepared by
Maritime Electric are forecast values that will, in all likelihood,
differ from actual results.
Therefore, any over earnings during the three-year period from March 1,
2016 to February 28, 2019 shall be deposited to a separate RORA account.
Maritime Electric shall report the balance of this new RORA
account to the Commission monthly and annually, and the balance,
including accrued interest at the Company's short term borrowing rate,
shall be refunded to ratepayers commencing March 1, 2019 or as further
directed by the Commission.
Weather Normalization Mechanism
 Maritime Electric seeks to implement a weather
normalization reserve to mitigate volume and/or demand fluctuations
caused by temperature changes relative to historical averages.
According to Maritime Electric's evidence, weather normalization
reserves are common throughout the utility industry and are part of a
broader group of deferral reserves designed to mitigate volume or demand
 Maritime Electric does not currently utilize a
weather normalization reserve. The Company's request arises from
increased volatility in sales revenue and energy supply costs caused by
the increased use of electricity for space heating in recent years.
 Generally, a weather normalization mechanism allows
a utility to "reserve" revenue earned in colder-than-average years for
use in warmer-than-average years.
In a year when heating degree days ("HDD") are higher than
normal, a marginal net revenue amount would be subtracted from the
Company's income statement and added to the weather normalization
reserve. In a year when HDD
are lower than normal, a marginal net revenue amount would be added to
the Company's income statement and subtracted from the weather
 According to Maritime Electric's evidence, the
weather normalization reserve on the Company's balance sheet should,
over time, net to zero. As
a result, Maritime Electric does not anticipate the need for an
adjustment mechanism to deal with reserve balances.
 The Commission approves the weather normalization
reserve, on an interim basis only, for the period from January 1, 2016
to February 28, 2019.
 The Commission does have concerns about the impact
that a weather normalization reserve may have on the RORA account, in
particular, that contributions to the RORA account - and the associated
refunds to ratepayers - may be diminished as a result of the weather
normalization reserve. In
light of these concerns, Maritime Electric shall file with the
Commission, as part of its monthly reporting requirements, the monthly
balance of the weather normalization reserve.
Maritime Electric shall also file with the Commission, on or
before February 28 in each of 2017, 2018 and 2019, the year-end balance
of the weather normalization reserve.
 The Commission reiterates that the weather
normalization reserve is approved on an interim basis only. The
Commission will determine the appropriateness of continuing a permanent
weather normalization reserve based upon review and analysis of the
monthly and annual reports.
 As of March 1, 2016, the determination of
appropriate depreciation rates is within the Commission's jurisdiction
by virtue of section 23 of the EPA, which provides:
23. Every public utility shall carry a proper and
adequate depreciation account when the Commission, after investigation,
determines that the depreciation account can be reasonably required; the
Commission shall ascertain and determine what are proper and adequate
rates of depreciation of the several classes of property of each public
 The application of section 23 of the EPA
suspended during the five-year period in which the Energy Accord was in
effect. As a result,
depreciation rates were not regulated by the Commission during that
 Similarly, the Commission did not have jurisdiction
to regulate depreciation rates while the price cap regulation was in
effect, from 1994 to 2004.
 The Commission did, however, have authority to
regulate Maritime Electric's depreciation rates from 2004 to 2010, and
issued a number of orders dealing with depreciation during that period.
In April 2006, the Commission ordered Maritime Electric to file
an updated depreciation study by August 31, 2006 (see Commission Order
UE06-02). Although Maritime
Electric did file an updated depreciation study, the Commission found it
did not comply with certain limitations imposed by the
EPA, most notably
section 47(6). As a result,
Maritime Electric was ordered to file a further depreciation study
within 36 months (see Commission Order
The completion of the depreciation study was ultimately deferred
at the request of Maritime Electric (see Commission Order
At that time, Maritime Electric reported experiencing
"significant transitional accounting issues" arising from the adoption
of International Financial Reporting Standards.
Maritime Electric was ordered to provide quarterly updates to the
Commission on the proposed accounting standards.
 n December 2010, the Government introduced the
Energy Accord. As a result
of the Accord, section 23 of the
was suspended, as was the
Commission's jurisdiction to regulate depreciation rates.
Instead, input factors, including depreciation rates, were
legislated by the Government during the term of the Accord.
 Recognizing the end of the Energy Accord in
February 2016, Maritime Electric engaged Gannett Fleming to prepare a
depreciation study (the "2014 Depreciation Study").
The 2014 Depreciation Study was based on the Company's financial
results and assets in service up to and including December 31, 2014.
 On July 23, 2015, Maritime Electric filed its
Depreciation Rate Application with the Commission. The 2014 Depreciation
Study was included as part of that application.
 Maritime Electric proposes to adopt the
depreciation rates recommended in the 2014 Depreciation Study, effective
January 1, 2016. The
Company submits that the proposed changes to the depreciation rates
incorporate the estimated average service life of assets and a prudent
allowance for the cost of removal of assets upon retirement.
According to Maritime Electric, the proposed changes to
depreciation rates will serve to prevent further increases in the
accumulated reserve variance, assuming status quo in other variables.
The proposed changes to depreciation rates would result in an
increase of approximately $1.981 million (based on 2014 asset values) in
annual depreciation expense.
 Maritime Electric also requests an adjustment to
depreciation rates to incorporate the amortization of the accumulated
reserve variance associated with the Charlottetown Thermal Generating
Station's ("CTGS") impending retirement.
This increase to the depreciation rates would result in an
estimated increase in annual depreciation expense of $2.117 million,
based on 2014 asset values.
The Company proposes that further steps required to amortize the
accumulated reserve variance with respect to all other asset classes be
deferred until the filing of a subsequent depreciation study.
 Finally, Maritime Electric proposes to undertake
two further studies:
a decommissioning study with respect to the CTGS
that would provide an estimate of the cost of decommissioning and
retiring the facility and that also incorporates the Company's plans to
potentially stage the retirement of individual generation units at the
a depreciation study based on financial results up
to December 31, 2017. The Company proposes that the depreciation study
recommendations on the amortization of the
accumulated reserve variance for all other assets classes;
an updated proposed depreciation rate adjustment
recommendation reflecting the Company's updated plans with respect to
the timing of the retirement of the CTGS; and
the findings from the decommissioning study to
ensure a plan is implemented to provide for adequate and prudent
depreciation rates and an adequate reserve for future site removal of
 Maritime Electric's amended filing did not alter
its requests for relief with respect to matters of depreciation.
The Agreement adopted all of the aforementioned proposals made by
Maritime Electric with respect to depreciation.
 The Commission raised concerns with Maritime
Electric's request that depreciation rates be set effective January 1,
2016, as the Commission's authority to regulate depreciation rates under
section 23 of the EPA was suspended until March 1, 2016.
Maritime Electric explained that the input factors, including
depreciation rates, were legislatively set under the Energy Accord only
until December 31, 2015, notwithstanding that electricity rates were
legislated until February 29, 2016.
As a result, depreciation rates were not established for the
period from January 1, 2016 to February 29, 2016.
 Maritime Electric relies on certain provisions of
IRAC Act in support of the Commission's authority to set
depreciation rates prior to March 1, 2016.
In particular, Maritime Electric relies on section 12 of the
that allows the Commission to review, rescind or vary any order or
decision made by it, including previous orders and decisions with
respect to rates of depreciation. Maritime Electric also notes that the
Commission retains a general power of supervision with respect to public
utilities, pursuant to section 26 of the
Finally, Maritime Electric relies on sections 48(1)(b) and
48.1(1)(b) of the
as allowing the Commission to regulate input
factors, including depreciation rates, prior to March 1, 2016.
 The Commission accepts that certain of Maritime
Electric's classes of property, including the CTGS, are
Commission also accepts that the depreciation rates for Maritime
Electric's classes of property as proposed in the 2014 Depreciation
Study are proper and adequate.
The Commission further accepts that it has jurisdiction, pursuant
EPA, to establish depreciation rates effective
as of January 1, 2016.
 The Commission therefore orders that Maritime
Electric shall adopt the depreciation rates set forth in Appendix 5
hereto, effective as of January 1, 2016 (the "Depreciation Rates").
The Depreciation Rates shall remain in effect until varied by the
Electric shall record and incorporate into the Depreciation Rates the
recommended amortization of the accumulated reserve variance associated
with the CTGS commencing in 2016 and as outlined in Appendix 6 hereto.
The Commission considers it reasonable to defer the amortization
of the accumulated reserve variance with respect to all other asset
classes so as to balance the rate impact resulting from the change in
 On or before June 30, 2018, Maritime Electric shall
file with the Commission a decommissioning study with respect to the
CTGS as well as an updated depreciation study based on financial results
to December 31, 2017.
Interconnection Upgrade Project
 The amended filing advises the Commission that
Maritime Electric has entered into a Memorandum of Understanding and a
Construction Agency Agreement with the PEI Energy Corporation with
respect to the Interconnection Upgrade Project (the "Project").
 Generally, the Project is to install two subsea
cables with 180 MW capacity each to supplement and/or replace the two
existing 40-year-old subsea cables and includes related new
infrastructure in both New Brunswick and Prince Edward Island to
interconnect with existing electrical transmission infrastructure.
 The Company has included in the forecast financial
data the Company's share of the Project costs as estimated at the time
of the hearing. These costs are
included in the forecast rate increase for 2017 and 2018.
It also makes assumptions
concerning Company revenues from the Open Access Transmission Tariff
 The amended filing notes that the Company will seek
recovery of its portion of the Project costs as a component of the ECAM
and that these adjustments will survive the expiration of the Agreement.
 The Commission understands that the Project
involves Federal Government funding and that the Project cost, less
Federal Government funding, will be financed by the PEI Government and
the net cost of the Project will be billed by the PEI Government to
MECL, who in turn will recover these costs from ratepayers.
 The Commission understands that the net Project
costs as initially determined and included in the amended filing are
included in the 2.3% increase in rates for 2017 and 2018, respectively.
The Commission requires the
Company to file any proposal to adjust rates for any differential
between proposed Project costs and actual Project costs, once
 The Commission understands that the revenue
associated with any changes to the current interim OATT will require
Commission approval as part of a separate Company filing.
This may affect the rate
increase for 2016, 2017 and 2018 depending upon the materiality of the
OATT rate changes associated with final Project costs.
Demand Side Management ("DSM")
 The amended filing includes funding for a DSM
program that is yet to be approved by the Commission.
The funding level included in
the amended filing is consistent with the funding initially proposed and
rejected by the Commission in Commission Order
 The Company indicates that a new DSM program will
be put forward for Commission approval and thus has maintained the
funding as proposed previously in the amended filing. These DSM costs
are part of the 2.3% rate increase for 2016, 2017, and 2018.
 Any further DSM programs or expenditures by
Maritime Electric require Commission approval as part of a separate DSM
filing. The rate increase for
2016, 2017 and 2018 may also require adjustment depending upon the level
of DSM expenditures ultimately approved by the Commission.
 The foregoing reasons follow Commission Order
UE16-04, issued on
the 29th day of February, 2016 in Commission Docket UE20942, a copy of
which is attached hereto and forms part of this decision.
at Charlottetown, Prince Edward Island, this
11th day of July, 2016.
BY THE COMMISSION:
Scott MacKenzie, Q.C, Chair
Douglas Clow, CPA, Vice-Chair
John Broderick, Commissioner
Michael Campbell, Commissioner
Appendix 1 -
Section 12 of the
Island Regulatory and Appeals Commission Act
reads as follows:
may, in its absolute discretion, review, rescind or vary any order or decision made by it,
or rehear any application before deciding it.
Parties to this proceeding seeking a review of the
Commission's decision or order in this matter may do so by filing with the Commission, at
the earliest date, a written Request for Review,
which clearly states the reasons for the review and the nature of the relief sought.
13(2), 13(3), and 13(4) of the
Act provide as follows:
13.(1) An appeal lies from a decision or order of
the Commission to the Court of Appeal upon a question of law or
(2) The appeal shall be made by filing a notice of
appeal in the Court of Appeal within twenty days after the decision or
order appealed from and the rules of court respecting appeals apply with
the necessary changes.
(3) The Commission shall be deemed to be a party to
(4) No costs shall be payable by any party to an
appeal under this section unless the Court of Appeal, in its discretion,
for special reasons, so orders.
In accordance with IRAC's Records
Retention and Disposition Schedule, the material contained in the official
file regarding this matter will be retained by the Commission for a period
of 5 years.