Enbridge outlines three-tier corporate cost-allocation approach at Utah PSC conference

Enbridge staff explained the company’s approach to allocating parent-level corporate expenses to operating utilities during a technical conference before the Utah Public Service Commission.

The allocation process, presenters said, first attempts direct assignment of costs to a specific business unit. If that is not possible, costs are attributed to a business segment (for example, gas distribution) and split among companies in that segment. Remaining indirect costs are allocated across the enterprise using one of three drivers—salary, revenue, or a three-factor formula of revenue, compensation and plant—chosen to match the underlying cost driver.

Why it matters: how Enbridge allocates corporate expenses affects what Questar Gas asks to recover in rates because those allocations flow into the company’s revenue requirement and rate-base calculations.

Enbridge described the three-factor method and how it is applied. “Each factor has the same weightage, 33.333%,” the company’s cost-allocation representative, Virgil (Enbridge cost allocations group, phone), said. The company said it first normalizes revenues by removing commodity pass-throughs before using revenue as a driver for allocation so that commodity volume swings do not distort allocations.

Commissioner John Harvey pressed for clarity on the mechanics. “If all 3 factors have the same weight, they would have no impact on the outcome. So it needs to be the same as multiplying by 1. So I don't understand why we're talking about 3 factor if they have the same weight,” Commissioner Harvey said. Enbridge staff answered with a stepwise example showing that each company’s percentage of enterprise revenue, compensation and plant differs, and those differing percentages (each multiplied by one-third) are summed to produce the allocation percentage for each factor.

Enbridge said most indirect costs are allocated using the three-factor formula and that revenue or salary drivers are used only for specific service categories (for example, treasury or shareholder services). Enbridge also said it groups over 300 cost centers into about 10 centralized functions (IT, HR, finance, legal, supply chain, safety and reliability, chief development officer, executive and others) and assigns drivers at the service-category level.

Questions from intervenors covered currency translation for cross-border allocations, with Enbridge saying allocations are booked in Canadian dollars and translated at the spot rate on posting; forecast exchange rates for allocation modeling come from the company’s treasury forecasts. The company said more than 90% of the indirect cost pool is allocated via the three-factor formula.

The commission requested supporting schedules; Enbridge agreed to provide a full schedule of central-function cost centers and the drivers used for each service category.

Ending: commissioners flagged the corporate allocation method and supporting schedules as items for follow-up as the rate case proceeds.