AESO Responses to Information Reuests AESO 2010-2011 Deferral Account Reconciliation

AESO Responses to Information Reuests
AESO 2010-2011 Deferral Account Reconciliation
Application No. 1608444, Proceeding ID No. 1878
AUC-AESO-001(a-b)
Reference
Exhibit 2, Application, page 25
Issue/Sub-Issue
Accuracy of the data
Quote
“The AESO considers that the controls ensure the reliability of the deferral reporting system. In addition,
the AESO conducts periodic rotational operating audits, reviews and procedures to determine the
existence and effectiveness of the internal controls as they relate to the AESO’s operations and
compliance with laws and regulations. Accordingly, in 2009 the AESO contracted
PricewaterhouseCoopers (PWC) to complete specified procedures to assess the accuracy of the data
sorting and calculations performed in the deferral reporting system to determine and allocate deferral
account balances to individual market participants.”
And
“The AESO has not contracted further compliance reviews of its deferral account reconciliations, beyond
that provided by PricewaterhouseCoopers and filed during the 2009 deferral account reconciliation
application proceeding.”
Request
(a)
On what frequency does the AESO conduct the periodic rotational operating audits, reviews and
procedures to assess the accuracy of the data sorting and calculations performed in the deferral
reporting system to determine and allocate deferral account balances to individual market
participants?
(b)
When does the AESO next plan to conduct a compliance review of its deferral account
reconciliations?
Response
(a-b)
To date, the AESO has contracted for only one compliance review of the deferral reporting
system by a third party, as provided by PricewaterhouseCoopers in 2009 and discussed in the
quoted text. The 2010-2011 deferral account reconciliation application is the fourth application by
the AESO to rely on the calculations and reports of the AESO’s deferral reporting system. The
AESO notes that no calculation errors or discrepancies have been identified in the calculations
and reports of the system.
When updating the deferral reporting system for preparation of a deferral account reconciliation
application, the AESO completes extensive internal testing to ensure the continuing accuracy of
the data sorting and calculations. In addition, in 2012 the AESO made enhancements to further
automate this internal testing.
AESO 2010-2011 Deferral Account Reconciliation
AESO Responses to Information Requests
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Given this extensive and enhanced testing and the lack of any identified issues or concerns with
the results of the deferral reporting system, the AESO currently has no plans to contract for
additional third-party reviews of the deferral reporting system.
AESO 2010-2011 Deferral Account Reconciliation
AESO Responses to Information Requests
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AESO Responses to Information Reuests
AESO 2010-2011 Deferral Account Reconciliation
Application No. 1608444, Proceeding ID No. 1878
AUC-AESO-002
Reference
Exhibit 2, Application, page 17 and page 21
Issue/Sub-Issue
Wind forecasting service cost recovery Rider J
Quote
“Costs paid by the AESO in 2010 and 2011 related to the wind forecasting service are being recovered by
the AESO through Rider J and are not subject to retrospective deferral account reconciliation. For
information, the AESO notes that the wind forecasting service is forecast to cost $0.3 million per year
from 2010 through 2013 inclusive. The AESO has not included reconciliation of wind forecasting service
costs in this application.”
And
“As discussed by the AESO in previous deferral account reconciliation proceedings, the AESO considers
this application and related proceeding to be the proper venue in which to consider the prudence of
AESO costs incurred with respect to 2011 and 2010.”
Request
In what application does the AESO intend to outline the 2010 and 2011 actual costs and its recovery of
costs for the wind forecasting service being recovered by the AESO through Rider J?
Response
The rider sheet for Rider J includes actual and forecast amounts for the costs, energy production, and
revenue used to determine the Rider J charge for 2010 through 2013. As noted in subsection 2(4) of
Rider J, “At the end of each calendar year, the ISO will adjust the charge for the remaining calendar years
to reflect variances from the forecasts of cost and energy … and will incorporate the adjustments in the
table in the ISO tariff for the following calendar year.”
The AESO plans to include Rider J adjustments in annual tariff updates in accordance with the process
proposed as part of its 2010 ISO tariff application and approved in Commission Decision 2010-606. The
AESO notes it has delayed the 2012 tariff update due to other priorities. The AESO will file the 2012
update, including adjustments to Rider J, in the third quarter of 2012.
AESO 2010-2011 Deferral Account Reconciliation
AESO Responses to Information Requests
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AESO Responses to Information Reuests
AESO 2010-2011 Deferral Account Reconciliation
Application No. 1608444, Proceeding ID No. 1878
AUC-AESO-003(a-b)
Reference
Exhibit 2, Application, page 37, paragraph 194
Issue/Sub-Issue
2011 contract services and consultants
Preamble
The AESO attributes a $3.1 million increase in contract services and consultant costs primarily to the
development of a competitive process and participation in regulatory proceedings.
Request
(a)
Please allocate the $3.1 million variance as between (1) competitive process costs, (2)
participation in regulatory proceedings costs and (3) other costs.
(b)
Please provide the total amount of AESO consultant or contract services expenditures related to
the development of a competitive process in each of 2010 and 2011.
Response
(a)
The requested information is provided in the summary below.
Budget
$ 000 000
Actual
$ 000 000
Variance
$ 000 000
Competitive process
0.5
2.0
(1.5)
Participation in regulatory proceedings
0.0
0.7
(0.7)
Other
0.0
0.9
(0.9)
Description
(b)
The total amount of AESO consultant or contract services expenditures related to the
development of a competitive process were:

2010: $0.1 million, and

2011: $2.0 million.
AESO 2010-2011 Deferral Account Reconciliation
AESO Responses to Information Requests
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AESO Responses to Information Reuests
AESO 2010-2011 Deferral Account Reconciliation
Application No. 1608444, Proceeding ID No. 1878
CCA-AESO-001(a-c)
Topic
Salaries/Consultant Costs
Reference
Section 3.1.4, General and Administrative Costs
Preamble
With respect to staff and benefits, the AESO states, the 2011 recorded staff and benefit costs were $39.3
million, which is $5.4 million (or 16%) more than the 2011 approved forecast of $33.9 million. The AESO
states the increased expenditure enabled it to deliver an increased number of connection projects during
2011 as well as meet its ongoing business initiatives.
With respect to contract services and consultants the AESO states the 2011 recorded contract services
and consultants' costs were $13.9 million, which is $3.1 million (or 29%) more than the 2011 approved
forecast of $10.8 million. The AESO states the increase is primarily due to higher than anticipated costs
resulting from development of a competitive process, and participation in regulatory proceedings for
several transmission projects and ISO rules.
Request
(a)
Please provide an analysis showing the forecast and actual FTEs, base salaries, benefits,
incentive payments and overtime. Provide variance explanations between forecast and actuals
with respect to each of the components of salaries and benefits. Explain the due diligence
process that is in place internally to ensure, and to demonstrate to the AESO Board, that salaries
exceeding budget are prudent.
(b)
Please describe the systems, including incentives that are in place to ensure the highest levels of
work performance and observance of industry standards by AESO staff involved in delivery of
AESO services.
(c)
With respect to the explanations provided for increase in consultants' costs, please explain why
development of a competitive process and increased level of activity in relation to regulatory
proceedings were not anticipated in the budget. Explain the due diligence process that is in place
internally to ensure, and to demonstrate to the AESO Board, that consultants' costs exceeding
budget are prudent.
Response
(a)
The requested information is provided in the summary below.
AESO 2010-2011 Deferral Account Reconciliation
AESO Responses to Information Requests
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Forecast
$ 000 000
Actual
$ 000 000
Staff positions (FTEs)
353
353
—
Vacancy rate
8%
4%
Lower vacancy rate
Salaries
24.6
28.6
Reflecting lower vacancy rate and
increases to maintain competitive
salaries
Benefits
5.2
5.9
Reflecting lower vacancy rate and
increases to maintain competitive
benefits
Incentives
4.0
4.7
Reflecting lower vacancy rate and endof-year performance assessments
Description
Comments
The AESO Board reviews and approves recommendations made by management for annual
corporate base pay adjustments for staff. The recommended adjustment percentage is the result
of current market and economic indicators (such as salaries surveys and the Consumer Price
Index). At the end of each year during the company’s annual performance review process, the
AESO Board’s Human Resources, Compensation and Nominations Committee reviews all
relevant market information to determine the final corporate base pay adjustment presented to
the AESO Board for approval. The Human Resources, Compensation and Nominations
Committee provides consultation, advice and recommendations to the AESO Board on human
resources, compensation, and AESO Executive and AESO Board succession matters.
(b)
In conjunction with the compensation matters described in part (a), a non-guaranteed incentive
compensation is available as part of the AESO’s total compensation package to staff. Incentive
compensation is based the AESO’s achievement in relation to its goals and objectives during the
year and on an employee’s individual achievement and manner of achievement with respect to
competencies, goals, and overall performance. Incentive pay is reviewed and approved by the
Human Resources, Compensation and Nominations Committee and by the AESO Board.
(c)
The competitive process was a new activity for the AESO and its scope included considerable
uncertainty when the 2011 budget was prepared and approved. In particular, the complexity of
development the process was not anticipated.
The increase due to regulatory proceedings resulted from an unanticipated change in the costs
which the AESO had expected to be eligible to claim through the Commission’s cost claim
process.
On a regular and on-going basis, management reports to the AESO Board on the amounts and
associated explanations for variances of actual costs from the Board-approved budget. The
AESO Board is able to make inquiries of management throughout the year to ensure appropriate
fiscal management.
AESO 2010-2011 Deferral Account Reconciliation
AESO Responses to Information Requests
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AESO Responses to Information Reuests
AESO 2010-2011 Deferral Account Reconciliation
Application No. 1608444, Proceeding ID No. 1878
CCA-AESO-002(a-b)
Topic
Life Cycle Projects
Reference
Section 3.1.5 Capital
Preamble
At Para 201 the AESO states: At the same time, life cycle funding was more than forecast primarily due
to:

advancing the capital expenditures for the Oracle application server upgrade project into 2011; and

increased expenditures resulting from a more detailed understanding of the requirements to deliver the
core network upgrade project.
Request
(a)
Para 199 indicates life cycle funding was $5.7 million (or 88%) more than forecast in 2011.
Please identify the component of the $5.7 million increase attributable to advancement of the
Oracle application server upgrade and the portion related to network upgrade.
(b)
With regard to the network upgrade, please explain why the increase could not have been
anticipated in the budget. Indicate whether any portion of the increase is due to higher costs than
anticipated as opposed to increased work activity. For the portion of any increase resulting from
increased costs, provide explanations for the increase.
Response
(a)
The requested information is provided in the summary below.
Lifecycle Project
(b)
Component of
$5.7 million
Funding Increase
Comments
Oracle Application
Server Upgrade
$1.2 million
Project timing advanced to take advantage of
an incremental 13% software discount.
Network Upgrade
$2.3 million
Variance primarily the result of increased
project scope due to complexity. A more
detailed explanation follows (see part (b))
Budget estimates are developed early in the project lifecycle and have an inherent degree of
uncertainty in them. As a project progresses through its lifecycle there is an improved
understanding of scope, schedule, and budget requirements. In the case of the network upgrade
project, the degree of uncertainty was recognized as being higher than normal. As a result, a
proof of concept phase was included in the scope of the project to further validate the budget
estimates and the capability of the proposed technology.
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AESO Responses to Information Requests
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The proof of concept work identified three significant considerations that would necessitate
additional project hardware requirements and increased work activity: These included:
(i) security requirements (incremental hardware requirements and work activity associated with
the implementation of the North American Electric Reliability Corporation (NERC) Critical
Infrastructure Protection (CIP) security standards);
(ii) risk management requirements (incremental work activity associated with assessing the
breadth of systems and infrastructure being impacted); and
(iii) network complexity (incremental hardware requirements and work activity associated with
safeguarding the AESO’s high-availability network configuration, the requirement for timely
secure stakeholder access, and the management of primary and secondary data centre
implications).
A change order itemizing the increases in scope, schedule, and budget required to address these
considerations was developed at the end of the proof of concept phase and subsequently
approved by AESO management as part of the ongoing capital portfolio management process.
AESO 2010-2011 Deferral Account Reconciliation
AESO Responses to Information Requests
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AESO Responses to Information Reuests
AESO 2010-2011 Deferral Account Reconciliation
Application No. 1608444, Proceeding ID No. 1878
CCA-AESO-003(a-b)
Topic
Energy Management System
Reference
Section 3.1.5 Capital
Preamble
The AESO states the Energy Management System (EMS) project is a major capital project with a multiyear budget of $20.7 million (including both capital and operating costs) approved by the AESO Board in
2009. Phase II of the project was completed in 2011. At the close of the project, $20.1 million in capital
costs and $0.7 million in operating costs had been incurred, compared to the approved budget of $20.1
million for capital costs and $0.6 million for operating costs. Overall, total recorded costs of $20.8 million
for the project were $1.1 million (or 5%) more than the approved budget.
Request
(a)
Please describe the purpose of the EMS project and indicate whether the scope of the project
was changed during its execution. If the scope was changed, please provide details including
nature of the changes and approvals received.
(b)
At paragraph 200, the AESO indicates Phase III of the EMS project has been rescheduled to
2012. Please provide the approved capital budget for each phase of the project. Compare the
actual capital costs incurred up to 2011, by Phase, with the corresponding budgeted costs and
provide explanation for variances.
Response
(a)
The AESO’s Energy Management System (EMS) is a highly-critical system used by system
controllers to monitor and control the Alberta interconnected electric system, including interties, in
order to ensure ongoing supply and reliability. The purpose of the EMS project was to replace the
AESO’s dated Energy Management System which had reached the end of its technology
lifecycle.
The project has been broken into three phases in an effort to minimize risk. The phases are:

Phase I – initial implementation of the Alstom EMS, replacing the old ABB EMS;

Phase II – resolution of Phase I defects, implementation of advanced application modules,
and provision of network and user interface enhancements; and

Phase III – upgrade of modeling software, implementation of control room console and video
wall upgrades, and removal of old ABB EMS network.
Please see part (b) for comments on variances, including scope changes.
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(b)
The requested project cost detail (budget vs. actual) per phase and variance explanation follows:
Phase
Budget
Actual
Variance
$ 000 000 $ 000 000 $ 000 000
Phase I

Capital

Operating

Total
17.3
0.6
17.9
18.3
0.6
18.9
(1.0)
0.0
(1.0)
Phase II

Capital

Operating

Total
2.8
0.0
2.8
3.0
0.1
3.1
(0.2)
(0.1)
(0.3)
Explanation

Capital variances were primarily the
result of interest and exchange rate
charges.

Capital budget variances were primarily
the result of vendor delivery issues. This
issue has been rectified and several
mitigation plans have been
implemented. A robust service support
agreement is in place, a maintenance
agreement is in place, and a
development expectation model is in
place that must be met by the vendor.
Operating budget variances were
primarily the result of unbudgeted
training and miscellaneous project costs.

Phase III
To date:

Capital
3.0
0.3

Operating
0.0
0.0

Total
3.0
0.3
Numbers may not add due to rounding.
AESO 2010-2011 Deferral Account Reconciliation
AESO Responses to Information Requests
Active
project
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AESO Responses to Information Reuests
AESO 2010-2011 Deferral Account Reconciliation
Application No. 1608444, Proceeding ID No. 1878
EDTI-AESO-001
Reference
AESO 2010-2011 Deferral Account Reconciliation Application- Page 21, Paragraph 88
Preamble
“88. Where adjustments relate to a calendar year prior to the year being reconciled in a deferral account
reconciliation application, those adjustments are considered “prior-period adjustments”. The prior-period
adjustments are attributed to the appropriate production months, as discussed in Section 2.2 of this
application. Prior-period adjustments which related to 2009, 2008, 2007, 2006, 2005, and 2004 are
included in the reconciliations for those years discussed above.”
Request
A review of AESO’s 2010-2011 Deferral Account Reconciliation application indicates significant amounts
in Prior Period Adjustments for years as far back as 2007 (4th reconciliation). Could AESO please
suggest a comprehensive set of measures (besides Reconciliation based on Forward Projections) to
reduce the magnitude and volatility of variances of prior period adjustments for individual market
participants?
Response
The AESO considers the request to include three aspects:
(i) can the magnitude and volatility of prior-period adjustments be reduced?
(ii) can the impact of those adjustments on market participants in general be reduced?
(iii) can the impact of those adjustments on individual market participants be reduced?
Each of these is addressed in turn below.
(i)
Table 2-5 in the application reveals that about 95% of prior-period deferral account balances
relate to wires costs. As discussed in previous deferral account reconciliation proceedings (for
example, in information response Comm.AESO-001(e) in the AESO’s 2004-2007 deferral
account reconciliation proceeding), prior-period wires costs variances arise from regulatory
decisions which may:

cause historical utility practice to be revisited, such as Decision 2007-104 regarding ATCO
Electric tax liability;

finalize costs previously approved on an interim basis, such as Decision 2010-056 regarding
final approval of ATCO Electric’s 2009 transmission facility owner revenue requirement; or

settle cost for transmission facility owner deferral accounts, such as Decision 2010-284
regarding reconciliation of AltaLink’s 2007-2008 direct assigned capital deferral account.
It appears that decisions changing historical utility practices are relatively uncommon. However,
decisions finalizing interim costs or settling transmission facility owner deferral accounts are
expected to occur regularly and could affect periods occurring two or three years earlier.
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Of the eleven significant prior-period adjustments listed in section 2.1.1 of the AESO’s 2010-2011
deferral account reconciliation application (page 15, paragraph 64):

six adjustments (representing 45% of the aggregate total magnitude of all the significant
adjustments) related to finalization of costs previously approved on an interim basis, and

three adjustments (representing 49% of the aggregate total) related to settlement of
transmission facility owner deferral accounts.
In particular, prior-period adjustments resulting from settlement of transmission facility owner
deferral accounts may be unavoidable given that the deferral account is subject to a regulatory
process before a decision is rendered, which then results in the AESO receiving an adjustment
relating to the deferral account.
As a not-for-profit entity, the AESO has no shareholder, as such, and it generates no return nor
has any equity component of a capital structure which could accommodate adjustments. There
are no apparent means available to the AESO to reduce the magnitude and volatility of priorperiod adjustments resulting from regulatory decisions which ultimately require the AESO to pay
or refund amounts to transmission facility owners. Section 14(3) of the Electric Utilities Act
requires that the AESO “must be managed so that, on an annual basis, no profit or loss results
from its operation.” The AESO therefore concludes that all prudently-incurred adjustments to its
costs and revenues must be subject to deferral account treatment without limitation. The AESO
also assumes that adjustments resulting from regulatory decisions will always be prudentlyincurred.
(ii)
With changes approved as part of the AESO’s 2010 ISO tariff proceeding, Rider C has become
the AESO’s primary means of reducing the impact of prior-period adjustments on market
participants in general. As noted in subsection 2(5) of Rider C, the calculation of Rider C amounts
may now include transactions that relate to prior years. Prior to July 1, 2011 (the effective date of
the tariff approved through the 2010 ISO tariff proceeding), prior period adjustments were
excluded from Rider C calculations and were instead settled through annual deferral account
reconciliations.
This change has had limited impact on the AESO’s 2010-2011 deferral account reconciliation as
it only became effective in mid-2011. However, the AESO notes that the net $2.1 million surplus
balance of prior-period adjustments in its 2010-2011 deferral account reconciliation application is
greater in magnitude than the overall $1.6 million shortfall balance reconciled over all years in the
application. This reflects the ability of Rider C to reduce overall deferral account balances,
including those relating to prior periods.
The AESO considers the use of Rider C or other similar deferral account adjustment mechanism
to be the most appropriate measure to reduce the impact of prior-period adjustments on market
participants in general.
(iii)
Section 12.1 of the 2010-2011 deferral account reconciliation application (pages 105-106,
paragraphs 532-534) explains, “10 Rate DTS [and] Rate FTS market participants and 39 Rate
STS market participants will receive refunds totalling $11.9 million as a result of this 2010-2011
application, while 40 Rate DTS and Rate FTS market participants and no Rate STS market
participants will receive charges totalling $13.5 million at the same time. The total charges are
$11.9 million more than the $1.6 million net deferral account shortfall being settled. This $11.9
million amount indicates the magnitude of the reallocation of Rider C charges and refunds among
market participants in this reconciliation.”
This illustrates that, although Rider C can reduce the impact of prior-prior period adjustments and
of deferral account balances on market participants in general, a deferral account reconciliation
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involves reallocation of Rider C charges and refunds that can significantly impact individual
market participants.
The AESO considers that the reallocation of Rider C charges and refunds results from two
causes.

Rider C amounts are determined on a $/MWh basis while deferral account reconciliations are
determined on a revenue basis reflecting underlying $/MW and $/month amounts in some rate
components. This difference results in Rider C amounts being reallocated on the basis of
more accurate billing determinants in a reconciliation application.

Rider C amounts are collected and refunded in the current year, even though the shortfall or
surplus may arise from prior-year transactions. When prior-year amounts are allocated to
market participants in the appropriate production year, the allocated amounts may differ from
the Rider C amounts collected or refunded in the current year.
The first cause, arising from differences in billing determinants, may be addressed by modifying
Rider C to more closely match the billing determinants for each rate component or to a
percentage of revenue in each rate component. Such a change should reduce the reallocation
that occurs in a deferral account reconciliation.
The second cause, arising from difference in collection (or refund) year and production year,
could be addressed by moving from retrospective to prospective reconciliation. However, market
participants have previously expressed a preference for retrospective reconciliations, at least
while significant deferral account balances are being reconciled. Other changes to the AESO
tariff, as discussed in section 2.8 of the application (pages 26-27, paragraphs 117-118), may
reduce deferral account balances such that market participants may support prospective
reconciliation of the AESO’s deferral accounts.
The AESO considers that either a change to the billing determinant basis for Rider C or a change
to prospective reconciliation would constitute a change to the design of Rider C, which the
Commission directed the AESO to discuss with stakeholders and report on in its next
comprehensive tariff application. As explained in the AESO’s response (page 109,
paragraphs 542-543) to the Commission direction from Decision 2011-049 on the AESO’s 2009
deferral account reconciliation, “The AESO expects to begin consultation for its next
comprehensive tariff application in mid-2012. The application will be filed with the Commission no
later than March 31, 2013 in accordance with Direction 23 in Decision 2010-606.”
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