decision 21785-d01-2018-fortisalberta and municipality of ... · calgary, alberta fortisalberta...

Decision 21785-D01-2018

FortisAlberta Inc. Sale and Transfer of the Municipality of Crowsnest Pass Electric Distribution Assets Municipality of Crowsnest Pass Permission to Cease and Discontinue Operations June 5, 2018

Alberta Utilities Commission

Decision 21785-D01-2018

FortisAlberta Inc.

Sale and Transfer of the Municipality of Crowsnest Pass Electric Distribution System Assets

Application 21785-A001

Municipality of Crowsnest Pass

Permission to Cease and Discontinue Operations

Application 21785-A002

Proceeding 21785

June 5, 2018

Published by the:


Eau Claire Tower, 1400, 600 Third Avenue S.W.

Calgary, Alberta

T2P 0G5

Telephone: 403-592-8845

Fax: 403-592-4406

Website: www.auc.ab.ca

http://www.auc.ab.ca/

Contents

1 Decision summary ................................................................................................................. 1

2 Introduction and background .............................................................................................. 1

3 Discussion ............................................................................................................................... 3

4 Commission findings ............................................................................................................. 4 4.1 Stage one: public interest ............................................................................................... 4

4.1.1 Change in FortisAlberta’s roles and responsibilities ........................................ 6 4.2 Stage two: Prudence of the purchase price .................................................................... 7

4.2.1 Introduction on rate implications ...................................................................... 7 4.2.2 Method for calculating the purchase price ........................................................ 8

4.2.3 Depreciation .................................................................................................... 10 4.2.4 Other adjustments ........................................................................................... 12

5 Summary .............................................................................................................................. 13

Appendix A - Proceeding participants ...................................................................................... 15

Decision 21785-D01-2018 (June 5, 2018) • 1


Calgary, Alberta

FortisAlberta Inc.

Sale and Transfer of the Municipality of Crowsnest Pass

Electric Distribution Assets

Municipality of Crowsnest Pass Decision 21785-D01-2018

Application for Permission to Cease and Proceeding 21785

Discontinue Operations Applications 21785-A001 and 21785-A002

1 Decision summary

1. In this decision, the Alberta Utilities Commission must decide whether to approve

applications by FortisAlberta Inc. (FortisAlberta) and the Municipality of Crowsnest Pass

(Municipality) for the sale and transfer of the municipality’s electric distribution system and

related assets under the terms specified in the asset purchase agreement.1 In addition, and at the

request of FortisAlberta, the Commission also will consider the reasonability, calculation and

prudence of the purchase price of $3,745,902.

2. After consideration of the record of the proceeding, and for the reasons outlined in this

decision, the Commission finds that approval of the sale and transfer of the municipality’s

electric distribution system and related assets is in the public interest. However, the Commission

is not persuaded that the depreciation component of the purchase price represents a valid

estimate of the electric distribution system assets and, accordingly, does not consider the

purchase price amount of $3,745,902 to be prudent.

2 Introduction and background

3. On July 5, 2016, the Municipality applied to the Commission for approval to cease and

discontinue the operation of its electric distribution system on the basis that the assets are to be

sold and transferred to FortisAlberta in accordance with the terms of the asset purchase

agreement, and pursuant to sections 25, 29 and 30 of the Hydro and Electric Energy Act. The

Municipality’s application was registered as Application 21785-A002.

4. Also, on July 5, 2016, FortisAlberta filed an application with the Commission requesting

approval of the sale of assets for the purchase price of $3,745,902 and transfer of the

Municipality’s electric distribution service area to FortisAlberta, pursuant to sections 25, 29 and

30 of the Hydro and Electric Energy Act. FortisAlberta’s application was registered as

Application 21785-A001. FortisAlberta also requested an assessment of the prudence of the

purchase price.2

5. FortisAlberta and the Municipality requested that the Commission consider the

applications jointly; therefore, the Commission combined the consideration of the applications

into Proceeding 21785.

1 Exhibit 21785-X0007, FortisAlberta Inc. Crowsnest Pass Service Area Transfer Application. 2 Exhibit 21785-X0041, FAI-AUC-2016NOV08-001_0043(a).

Sale and Transfer of the Municipality of Crowsnest Pass Electric Distribution Assets FortisAlberta Inc. Permission to Cease and Discontinue Operations Municipality of Crowsnest Pass

2 • Decision 21785-D01-2018 (June 5, 2018)

6. On July 27, 2016, the Commission issued a notice of applications for Proceeding 21785,

with a deadline of August 17, 2016, for submissions to express objections, concerns, or support

for one or more of the applications. The notice was published on the AUC website and

notification was automatically emailed to eFiling System users who had chosen to be notified of

notices of application issued by the Commission.

7. No submissions were received by the submission deadline of August 17, 2016.

8. On July 28, 2016, the Commission issued information requests (IRs) to both

FortisAlberta and the Municipality to clarify details of the applications. Both FortisAlberta and

the Municipality submitted responses on August 11, 2016.

9. On August 30, 2016, the Commission issued a second round of IRs to FortisAlberta to

clarify details of the payment of compensation to the Municipality. FortisAlberta submitted its

responses on September 20, 2016.

10. On November 8, 2016, the Commission issued a third round of IRs to FortisAlberta to

clarify details of the prudence of the purchase price of the Municipality’s electrical distribution

system assets. FortisAlberta submitted its responses on November 8, 2016.

11. On November 16, 2016, the Commission issued a notice of review of the prudence of the

purchase price for the sale of the Municipality’s electric distribution system assets, with a written

submission deadline of November 30, 2016. The notice was issued to inform parties that the

Commission’s rate making function, as well its function to issue facility approvals for the

purchase and sale of the Municipality’s electric distribution system, were engaged in this

proceeding.

12. No submissions were received.

13. On December 16, 2016, the Commission issued a letter to FortisAlberta and the

Municipality informing them that the Commission would suspend its consideration of

Proceeding 21785 until it issued a decision on Proceeding 21768 due to the similarity of the

issues raised in each proceeding.

14. On October 3, 2017, the Commission issued Decision 21768-D01-20173 with respect to

Proceeding 21768. The Commission re-commenced its consideration of Proceeding 21785 and

allowed interested parties an opportunity to file a statement of intent to participate (SIP) by

November 10, 2017. No SIPs were received by the Commission.

15. The Commission considers the record of this proceeding to have closed with the

submission of argument from FortisAlberta and the Municipality on March 6, 2018 and

March 7, 2018, respectively.

16. In reaching the determinations set out within this decision, the Commission has

considered all relevant materials comprising the record of this proceeding. Accordingly,

references in this decision to specific parts of the record are intended to assist the reader in

3 Decision 21768-D01-2017: Office of the Utilities Consumer Advocate, Commission-Initiated Review and

Variance of Decision 20552-D01-2015 and Decision 20733-D01-2015, Proceeding 21768, October 3, 2017.


Decision 21785-D01-2018 (June 5, 2018) • 3

understanding the Commission’s reasoning relating to a particular matter and should not be taken

as an indication that the Commission did not consider all relevant portions of the record with

respect to a particular matter.

3 Discussion

17. The Municipality operates an electric distribution system in its service area within its

boundaries. The operation of the electric distribution system within this service area was

approved previously by the Energy Resources Conservation Board in Approval HE 8705.4 At

that time, the three municipality-owned service area regions corresponding to the former towns

of Coleman and Blairmore and the village of Frank were amalgamated into the Municipality.

18. FortisAlberta entered into a municipal franchise agreement with the Municipality,

whereby FortisAlberta provides electric distribution service to the majority of the residents

within the Municipality. FortisAlberta also has an adjacent service area situated within the

Municipality’s boundaries.5

19. The Municipality indicated that by virtue of the contiguous nature of the Crowsnest Pass

and FortisAlberta service areas within the municipal boundaries, and to support the exclusive

nature of the municipal franchise agreement with FortisAlberta, it requested that FortisAlberta

provide a formal offer to purchase the electric distribution system assets of the Municipality. The

Municipality indicated that the sale and transfer would harmonize the provision of electric

distribution service for all customers within the boundaries of the Municipality.

20. In its application, FortisAlberta also submitted that the transfer would secure the services

of a stable and reliable long-term supplier of electric distribution service to the benefit of all

customers within the community. FortisAlberta added that along with the majority of customers

it already serves, it would provide continuity of service to the customers previously served by the

Municipality and would operate, maintain, replace, reconstruct, alter or upgrade the facilities in

accordance with the municipal franchise agreement.

21. FortisAlberta and the Municipality stated that the finalization of the transfer of the

Municipality’s assets was to occur on or before November 1, 2016.

22. FortisAlberta indicated that the requested service area land is approximately

3.7 square kilometres and the Municipality’s assets to be sold to FortisAlberta are composed of

typical distribution assets such as poles, overhead and underground conductor, transformers and

street lights.

23. FortisAlberta stated that there are approximately 1,530 residential and general service

customers, as well as municipal street lights, which, once transferred to FortisAlberta, would be

subject to FortisAlberta’s Distribution Tariff and the corresponding rates based on the applicable

service and load characteristics for each point of service.

4 Approval HE 8705, Application 870728, June 18, 1987. 5 Approximately 60 per cent as per Exhibit 21785-X0011, Municipality of Crowsnest Pass Service Area Transfer

Application, paragraph 3.


4 • Decision 21785-D01-2018 (June 5, 2018)

24. The Municipality stated it instituted a community consultation process related to the

potential sale. The Municipality stated it notified residents through direct mail, billboards,

radio advertisements, printed advertisements in the Crowsnest Pass Herald, and by posting a

news release on its website. It also held two open houses to consult with the Municipal

community.

25. The Municipality indicated that after undertaking the public notification process, the

council of the Municipality, at a regular meeting held on April 19, 2016, unanimously passed a

resolution to proceed with the sale of the Municipality’s electric distribution system assets to

FortisAlberta for a purchase price of $3,745,902. The Municipality stated that this offer amount

reflects the valuation method of replacement cost new, less depreciation, which it claimed to be

consistent with compensation for service area alterations contemplated in Subsection 29(4) of the

Hydro and Electric Energy Act. The asset purchase agreement between the Municipality and

FortisAlberta is dated June 27, 2016.

4 Commission findings

26. The Commission will consider the applications in two stages. In stage one, the

Commission will consider whether approval of the sale and transfer transaction is in the public

interest (facility approval function). In stage two, the Commission will consider whether to

approve the prudence of the purchase price (rate making function).

4.1 Stage one: public interest

27. With the approval of the Commission, an electric distribution system may cease

operations under Section 29 or discontinue operations under Section 30 of the Hydro and Electric

Energy Act. The salient sections are reproduced below:

Boundaries 29(1) The Commission, on the application of an interested person or on its own motion,

(a) when in its opinion it is in the public interest to do so, and

(b) on any notice and proceedings that the Commission considers suitable, may alter

the boundaries of the service area of an electric distribution system, or may order

that the electric distribution system shall cease to operate in a service area or part

of it at a time fixed in the order.

…

(4) When an order made under subsection (1) or (3) reduces the service area of an

electric distribution system, the Commission, if it considers such a provision suitable,

may make provision in the order for

(a) payment of compensation to the owner of the electric distribution system whose

service area is reduced,

(b) the circumstances and conditions under which, and the time at which, that owner

is entitled to receive compensation,


Decision 21785-D01-2018 (June 5, 2018) • 5

(c) the matters in respect of which any compensation is payable, which matters may

include

(i) any facilities transferred, based on reproduction cost new, less

depreciation, [emphasis added]

…

Discontinuance of service 30(1) No holder of an approval under this Part and no person who operated an electric

distribution system on June 1, 1971 shall discontinue the operation of the holder’s or

person’s electric distribution system or discontinue the distribution of electric energy in

any area, except in a case of emergency or for repairs and maintenance, unless the holder

or person has obtained authority in writing from the Commission to do so.

(2) The Commission may make any order on an application under this section that it

considers just and proper and in the public interest.

28. Provisions in the Hydro and Electric Energy Act also address the sale of distribution

utility assets. Municipality-owned distribution utilities usually sell their assets to the electrical

utility in whose service area they are located. In making its decision on this application, the

Commission is aware of the ongoing need to provide utility service following the sale of

municipality-owned assets.

29. The Commission has reviewed the Municipality’s application to cease and discontinue its

operations and the asset purchase agreement and observes that supporting documentation, such

as the resolution and meeting minutes of the council of the Municipality and copies of

advertisements placed in the Crowsnest Pass Herald, were included with the application.

30. As stated above, the Municipality has applied to the Commission for permission to cease

and discontinue its operations in accordance with sections 29 and 30 of the Hydro and Electric

Energy Act. Section 29 allows an electric distribution utility to cease to operate in its service area

and Section 30 requires the Commission to determine if it is in the public interest to grant a

request by an applicant to discontinue the distribution of electric energy in any area.

31. In consideration of FortisAlberta and the Municipality’s applications, the Commission

may also make any order that it considers just and proper and in the public interest.

32. In assessing the public interest of the sale and transfer applications, the Commission has

considered that FortisAlberta’s assets and operations are also located within the Municipality’s

boundaries. The Commission has also considered and relied upon the agreement of FortisAlberta

to continue to provide service to the customers served by the Municipality and to operate,

maintain, replace, reconstruct, alter or upgrade the facilities in accordance with the municipal

franchise agreement. Further, the Commission observes that the Municipality requested

FortisAlberta to make a formal offer and that the council of the Municipality has passed a

resolution unanimously to proceed with the sale of its electric distribution system and related

assets to FortisAlberta.

33. For the above reasons, the Commission finds that the transfer of the Municipality’s

electric distribution system and related assets to FortisAlberta is in the public interest.


6 • Decision 21785-D01-2018 (June 5, 2018)

34. Based on the foregoing, the Commission finds that it is in the public interest to grant the

Municipality’s application to “cease to operate” in its service area and discontinue operations of

its electric distribution system, pursuant to sections 29 and 30 of the Hydro and Electric Energy

Act, provided that the facilities are transferred to, and operated by, FortisAlberta pursuant to the

terms of the asset purchase agreement.

4.1.1 Change in FortisAlberta’s roles and responsibilities

35. In approving the applications, the Commission understands that the sale of the assets that

comprise the electric distribution system from the Municipality to FortisAlberta would result in a

change in roles and responsibilities related to the load settlement agent (LSA), meter data

manager (MDM) and wire service provider (WSP) functions.6 Presently, these functions are

being performed by ENMAX Power Corporation (EPC) on behalf of the Municipality. Given the

evidence on the record, the Commission understands that FortisAlberta, as the new electric

distribution owner of the assets in transfer, would be responsible for providing these services.

There is no indication on the record that EPC will be contracted to provide these services on

behalf of FortisAlberta. In the Commission’s view, it is imperative that EPC and FortisAlberta

co-operate during the transition of these roles and responsibilities to ensure the effective

functioning of the distribution system.

36. The entity providing the regulated service will also change after the sale is completed.

Currently, EPC provides the regulated service under a regulated rate tariff. The Commission

understands that EPCOR Energy Alberta GP Inc., as the regulated service provider in the

FortisAlberta service area, will assume this responsibility.

37. Section 2.18 of Rule 021: Settlement System Code Rules states the following:

Any market participant who proposes to cause a change to the party performing the role

and responsibilities of an LSA/MDM/WSP must provide written notice to each market

participant that may be affected by the change. The written notice must be provided at

least 90 calendar days prior to the date that the change is to take place. In addition to the

written notice, both the current LSA/MDM/WSP and the new LSA/MDM/WSP designate

must jointly submit a transition plan to both the AUC and to the ISO at least 60 calendar

days prior to the effective date of the change...

38. Rule 021 requires EPC and FortisAlberta to co-ordinate their activities to ensure the

transition of responsibilities occurs with minimal disruption to the retailers’ customer enrollment

and billing processes, the load settlement process and to the provision of service to customers.

This co-ordination will involve the sharing of customer information between EPC and

FortisAlberta as well as the sharing of information pertaining to regulated rate customers

between FortisAlberta and EPCOR Energy Alberta GP Inc. This sharing of customer information

is imperative to ensure customers are informed about, and prepared for, the change in

responsibilities. The Commission expects all parties to conform strictly to the requirements of

Rule 021 and expects that the customer information will be used solely for the purpose of

transitioning the Rule 021 responsibilities related to the Municipality’s distribution service area

to FortisAlberta.

6 These functions are defined and described in Rule 021: Settlement System Code Rules.


Decision 21785-D01-2018 (June 5, 2018) • 7

4.2 Stage two: Prudence of the purchase price

39. In its stage one assessment, the Commission has not made any findings on the prudence

of the purchase price to be paid by FortisAlberta to the Municipality. The Commission will

consider this issue in this section of the decision.

4.2.1 Introduction on rate implications

40. Under the Electric Utilities Act, the Commission must establish rates that provide the

distribution utility with a reasonable opportunity to recover its prudent costs to provide service to

its customers.

41. The Supreme Court of Canada has stated the following regarding prudence in relation to the

Electric Utilities Act:

However, these dictionary definitions are not so consistent and exhaustive as to provide a

complete answer to the question of the meaning of “prudent” costs in the context of the Alberta

utilities regulation statutes. As such, a contextual reading of the statutory provisions at issue

provides further guidance. In the context of utilities regulation, I do not find any difference

between the ordinary meaning of a “prudent” cost and a cost that could be said to be reasonable.

It would not be imprudent to incur a reasonable cost, nor would it be prudent to incur an

unreasonable cost.7

42. The Commission regulates distribution utilities under a performance-based regulation

(PBR) framework. On December 16, 2016, the Commission issued Decision 20414-D01-2016

(Errata, issued February 6, 2017): 2018-2022 Performance-Based Regulation Plans for Alberta

Electric and Gas Distribution Utilities (the PBR decision).8 The PBR decision approved PBR

plans for five distribution companies, for a five-year term commencing January 1, 2018. PBR

replaces traditional cost-of-service regulation as the annual rate-setting mechanism for utility

rates. The PBR framework provides a formula mechanism for the annual adjustment of rates

independent of the underlying costs incurred by the companies. In general, the companies’

going-in rates are adjusted annually by means of an indexing mechanism that tracks the rate of

inflation relevant to the prices of inputs the companies use, less an offset to reflect the

productivity improvements the companies can be expected to achieve during the PBR plan

period. There are certain adjustments that distribution companies can apply for that provide

treatment for certain costs not accounted for within the context of the indexing mechanism.

43. Once the Commission has determined the cost of an electric distribution system

acquisition to be prudent, the distribution utility may apply to the Commission for an adjustment

of its rates.

44. As stated above, FortisAlberta also requested that the Commission assess the prudence of

the purchase price. If the Commission were to find the purchase price to be prudent, then this

would facilitate FortisAlberta’s application for purchase price recovery in rates as part of the

annual PBR rate adjustment filing.

7 2015 SCC 45 at paragraph 33. 8 Decision 20414-D01-2016: 2018-2022 Performance-Based Regulation Plans for Alberta Electric and Gas

Distribution Utilities, Proceeding 20414, December 16, 2016. Errata issued on February 6, 2017.


8 • Decision 21785-D01-2018 (June 5, 2018)

4.2.2 Method for calculating the purchase price

45. FortisAlberta submitted that the purchase price was calculated using the valuation

method of replacement cost new, less depreciation, which is consistent with the compensation

for service area alterations, reproduction costs new less depreciation contemplated in the

Hydro and Electric Energy Act.

46. Since Subsection 29(4) of the Hydro and Electric Energy Act makes reference to

“reproduction cost new, less depreciation” while FortisAlberta makes reference to the use of

“replacement cost new, less depreciation”, the Commission has drawn upon its earlier findings in

Decision 21768-D01-2017. Similar to the process for consideration of the valuation methodology

in that decision, the Commission has evaluated the two components replacement cost new and

depreciation (D), in the circumstances of the current proceeding.

47. FortisAlberta stated that the purchase price was based on obtaining a “replacement”

value in lieu of a “reproduction” cost that generally consisted of physical survey, assessment

and gathering of pertinent information of the Municipality’s distribution network, as well

as interviews with the Municipality’s stakeholders. FortisAlberta argued that the

reproduction-based methodology would potentially nullify economies of scale and scope

achieved under the replacement-based method, as it would be challenging to determine costs of

constructing an older vintage asset using identical materials and to account for production

standards, quality of workmanship and asset design layouts of the time. Due to the limited

records available for the Municipality’s distribution assets, FortisAlberta advised that certain

assumptions were required to be made in order to determine a cost estimate for replacement of

the distribution facilities. FortisAlberta submitted that the use of replacement-based valuation in

system pricing is a reasonable and prudent approach and can be expected to result in

conservative pricing.

48. FortisAlberta provided a summary of how the replacement cost new, less depreciation

method has been applied and the calculation of the purchase price, which is illustrated in the

table below:

Table 1. Summary of replacement cost new less depreciation and purchase price calculation9 Municipally-owned service area region Material, labour and engineering cost

Blairmore $2,196,673

Coleman $2,412,189

Frank & Bellevue $798,924

Replacement cost new $5,407,786

Depreciation ($1,640,277)

Replacement cost new less depreciation $3,767,508

Adjustments to replacement cost new less depreciation price

Cost

Less: Cost of Removal -Poles & Meters ($121,086)

Add: Other Assets Purchased

Radial Boom Digger $40,000

Flat Deck Trailer $7,000

Inventory $52,480

Total Purchase Price $3,745,902

9 The Commission created this table from the evidence including Exhibit 21785-X0032, Attachment

FAI-AUC-2016JUL28-001.02.


Decision 21785-D01-2018 (June 5, 2018) • 9

49. FortisAlberta also noted that the purchase price was adjusted for the costs associated with

removing certain poles identified for immediate replacement and also the removal of mechanical

metering equipment incompatible with FortisAlberta’s billing system. In addition, FortisAlberta

included in its purchase price the fair market value of specific assets, such as a radial boom

digger and flat deck trailer, and an average material price of inventory items in general.

50. In its IRs to FortisAlberta,10 the Commission inquired about the various assumptions

applied by FortisAlberta to calculate the values for the replacement methodology used in the

derivation of the final purchase price of $3,745,902. FortisAlberta provided the following

explanation in regard to the methodology used:

FortisAlberta’s calculations of Replacement Cost New (RCN) are premised on the

construction of facilities in accordance with current industry standards and good utility

practice. Accordingly, the RCN calculation for the electric distribution assets of the

Municipality of Crowsnest Pass (CNP) was determined using FortisAlberta’s standard

construction practices for new projects using its estimating tool.

FortisAlberta did not assume that the replacement cost of the CNP assets would

correspond to the installation of a 4.16 kV [the voltage standard of the Municipality’s

existing system] system for the purpose of completing the RCN calculation. It developed

its replacement cost estimate based on a distribution voltage of 25 kV since similar

systems are currently constructed to this industry standard. FortisAlberta generated

estimates comparing replacement costs for specific components (e.g., transformers)

designed to operate at each voltage level and has determined that no incremental cost

increase results from the adoption of the 25 kV standard.11 [emphasis added]

51. In response to the Commission’s IR to provide an analysis that would substantiate

FortisAlberta’s conclusion that there is no incremental cost increase from the adoption of the

25-kilovolt (kV) standard in its calculation, FortisAlberta explained that the three main

equipment components that would differ between the Municipality’s 4.16-kV overhead

distribution system and a 25-kV distribution system were insulators, transformers, and overhead

primary conductors. In the table below, FortisAlberta provided unit cost values for each type of

equipment that differed between the two voltage standards:

Table 2. Equipment unit cost breakdown by system voltage

Equipment System Voltage Description Unit Cost ($)

Insulator 4.16 kV 25 kV

15 kV Voltage Class 25 kV Voltage Class

$10.00

$9.03

Transformer 4.16 kV 25 kV

2.4 kV Primary Winding, 25 kVA

14.4 kV Primary Winding, 25 kVA

$1,950

$1,128

Overhead Bare Conductor

4.16 kV 25 kV

3/0 ACSR

#2 ACSR

$1.25/metre

$0.59/metre

Source: Exhibit 21785-X0050.01, FAI-AUC-2017NOV24-002(a).

10 Exhibit 21785-X0033, AUC Information Request to FortisAlberta - Round 2. 11 Exhibit 21785-X0036, FAI-AUC-2016AUG30-001(e).


10 • Decision 21785-D01-2018 (June 5, 2018)

52. FortisAlberta indicated that its conservative approach of adapting to a 25-kV standard,

“confirms the effects of economies of scope and scale”12 resulting in a lower equipment cost and

economical system overall.

53. Further, FortisAlberta stated that since the Municipality’s system was first constructed,

the electrical industry’s safety code standards have been significantly updated, causing the

Municipality’s system, currently operating at 4.16-kV, to be one of the very few electric

distribution systems in North America operating at such a low voltage. FortisAlberta submitted

that this system voltage, while functional, is outdated and it should be a high priority to convert it

to 25-kV.

54. The Commission agrees with FortisAlberta that it would be a labour-intensive task to

determine the vintage of the assets in question, and obtain a reasonable cost estimate had

FortisAlberta chosen to use reproduction cost new methodology. Further, in the Commission’s

view, the evidence on the record of this proceeding is insufficient to support the use of a

“blended” valuation approach, which would combine both the replacement and reproduction cost

new methodologies to evaluate the Municipality’s assets when compared to the replacement cost

new less depreciation methodology.

55. For the above reasons, the Commission accepts that FortisAlberta’s use of the

replacement cost new less depreciation methodology is reasonable for the purposes of this

decision, subject to the findings on the depreciation (D) component calculations discussed in

Section 4.2.3. As noted previously, given the limited number of detailed records of the

Municipality’s assets, FortisAlberta could not determine the actual vintage of these assets in its

purchase price evaluation.

56. In light of the Commission’s acceptance of the replacement cost new less depreciation

methodology, the Commission finds, in this instance, that replacing the Municipality’s

infrastructure, resulting in a replica of the original 4.16-kV system, may result in a higher cost

system than an upgrade to a 25-kV system as illustrated in Table 2 above. The Commission also

accepts FortisAlberta’s argument with respect to the benefits of a higher voltage system

infrastructure, such as reliability, power stability, reduction in the amount of line loss, and ease

of future system expansion. Accordingly, the Commission considers it is reasonable to account

for the upgrades to a 25-kV system in the purchase price. The Commission approves the

replacement cost new value of $5,407,786 as reflected in the FortisAlberta proposal. The

following section will discuss the Commission’s findings of the D component of the replacement

cost new less depreciation methodology.

4.2.3 Depreciation

57. With respect to the D component of the replacement cost new less depreciation

methodology FortisAlberta provided the following explanation:

…FortisAlberta applied a depreciation rate based on the accumulated depreciation of the

Company’s distribution assets. The rate was calculated using FortisAlberta’s actual

accumulated depreciation on distribution assets, excluding site restoration and gain/loss,

as a percentage of gross book value of distribution assets, based on actuals reported in the

12 Exhibit 21785-X0050.01, FAI-AUC-2017NOV24-002(a).


Decision 21785-D01-2018 (June 5, 2018) • 11

2014 Rule 005 Report of Finances and Operations. This method provided a reasonable

estimate of accumulated depreciation for the acquired assets in the absence of detailed

asset vintages.13

58. FortisAlberta further clarified that its distribution asset rate base is composed of assets of

differing conditions and vintages, which are broadly similar to those of the Municipality.

Therefore, FortisAlberta submitted that the use of a ratio of accumulated depreciation to gross

book value provides a reasonable proxy of the accumulated depreciation associated with the

acquired assets in the absence of detailed, verifiable records.14 In its application, FortisAlberta

relied on the accumulated depreciation rate of 30.33 per cent that was applied towards the

replacement cost new amount of $5,407,786 and resulted in the D component of $1,640,277.15

59. At the request of the council of the Municipality, FortisAlberta prepared a

Municipality of Crowsnest Pass Electric Utility Assessment report (assessment report) in

September 2015, including an assessment of the electricity distribution system owned and

operated by the Municipality.16 In that report, FortisAlberta stated that its assessment of the

Municipality’s electric utility infrastructure was prepared using information obtained from the

Municipality’s manager of operations, as well as information collected by FortisAlberta through

an examination of the distribution facilities by qualified FortisAlberta operations staff and a

safety codes officer. FortisAlberta noted that the information gathered was reviewed further by

an experienced FortisAlberta asset maintenance engineer.

60. In addition, FortisAlberta identified the following key issues during its system

assessment: (i) 35 per cent of the power poles have reached the end of their life, with 70 per cent

of remaining poles reaching the end of life within the next 10 years; (ii) a visual inspection

determined that transformers were approximately 45 to 55 years old, with the service life of a

transformer being typically 50 years; (iii) primary and secondary conductors showed signs of

wear with the presence of a number of splices, which are indicative of a typical emergency

repair; (iv) while the underground system appeared to be in satisfactory condition, the placement

of a number of padmount transformers raised a concern, because such placement results in

premature aging of equipment and difficulties with power restoration during an outage; and, (v)

street lighting levels were not up to Illuminating Engineering Society of North America

standards.

61. In response to the Commission’s IR about FortisAlberta’s D component calculation,

FortisAlberta calculated an accumulated D amount of $3,474,000, that resulted in a replacement

cost new less depreciation value of $1,933,790.17 However, FortisAlberta was of the opinion that

significant caution should be exercised before drawing conclusions from this revised D

component. FortisAlberta submitted that in order to complete the calculations requested by the

Commission, it had to rely on unsubstantiated assumptions due to the lack of specific and

verifiable observations related to asset age. FortisAlberta concluded that there were several

limitations inherent in the source information relied upon in the development of the assessment

13 Exhibit 21785-X0031, Attachment FAI-AUC-2016JUL28-001.01. 14 Exhibit 21785-X0050.01, FAI-AUC-2017NOV24-003(a). 15 Exhibit 21785-X0032, Attachment FAI-AUC-2016JUL28-001.02_0032, Tab 3. 16 FortisAlberta assessment report of the electricity distribution system owned and operated by the Municipality,

http://www.crowsnestpass.com/public/download/documents/20968. 17 Exhibit 21785-X0052, Attachment B, Tab 1.


12 • Decision 21785-D01-2018 (June 5, 2018)

report that severely limit the usefulness of the conclusions it contains in a ratemaking

environment. Further, FortisAlberta stated that it could not submit or rely on such cursory and

incomplete information in its original application and decided to use the 30.33 per cent proxy

value based on FortisAlberta’s actual electrical distribution system depreciation.

62. The Commission observes that in the assessment report to the Municipality, FortisAlberta

concluded the following upon its inspection of the purchasing assets:

Based on FortisAlberta’s review, the Municipality of Crowsnest Pass electric utility

system is functional and when the system was constructed, it met the minimum safety

code requirements in place at the time. While the system assets met those now

grandfathered safety and construction standards, the majority of the system assets have

reached or are nearing the end of their service life and they no longer are up to current

construction, operating and maintenance standards. Safety code standards have been

updated significantly since the electricity system was first constructed.18

[emphasis added]

63. It is the Commission’s understanding that 30.33 per cent depreciation rate has been

applied to assets that have approximately 2/3 of their life remaining. The Commission is

concerned with FortisAlberta’s chosen methodology of applying 30.33 per cent towards the

Municipality’s assets that have reached or are near the end of their service life. The Commission

does not agree with FortisAlberta that this method provides a reasonable proxy for estimating the

accumulated depreciation associated with the acquired assets. The Commission disagrees that a

D component of $1,640,277 produces a value that is commensurate with the value of the

Municipality’s system. Equally so, the Commission is not convinced that the approach,

underlying assumptions, and methodology for obtaining the D component of $3,474,000 is

superior to execution of the original depreciation methodology.

64. In light of the above, the Commission has insufficient evidence on the record of this

proceeding to determine which approach is suitable to calculate the D component. As such, the

Commission is not persuaded that FortisAlberta’s application of the 30.33 per cent depreciation

rate, based on accumulated depreciation of FortisAlberta-owned distribution assets, is applicable

to the Municipality’s assets in light of the vintage of those assets being acquired.

65. Accordingly, FortisAlberta’s request for the Commission to find that the accumulated

depreciation amount of $1,640,277 employed in the replacement cost new less depreciation

methodology to be prudent is denied.

4.2.4 Other adjustments

66. As shown in Table 1, FortisAlberta adjusted the replacement cost new less depreciation

amount for the fair market value of specific assets, such as a radial boom digger and flat deck

trailer, an average material price of inventory items in general, as well as the cost of removal of

specific poles and meters. The summation of total adjustments resulted in a decrease of $21,606.

67. The Commission has reviewed FortisAlberta’s submissions regarding the adjusted items

as shown in Table 1 and considers each adjusted item to be generally reasonable for the purchase

18 FortisAlberta assessment report of the electricity distribution system owned and operated by the Municipality,

PDF page 6, http://www.crowsnestpass.com/public/download/documents/20968.


Decision 21785-D01-2018 (June 5, 2018) • 13

of this proceeding. The requested adjustments to the replacement cost new less depreciation

price, as shown in Table 1 above, are approved as filed.

5 Summary

68. The Commission has considered the applications in two stages. In stage one, the

Commission found the transfer of the Municipality’s electric distribution system operations and

related assets to FortisAlberta to be in the public interest. Accordingly, the Commission is

prepared to:

a) approve the application of the Municipality to cease to operate in its service area,

pursuant to Section 29(1) of the Hydro and Electric Energy Act

b) authorize the Municipality to discontinue its electric distribution system operations under

Section 30 of the Hydro and Electric Energy Act

c) order the incorporation of the service area of the Municipality into FortisAlberta’s service

area, pursuant to Section 25 of the Hydro and Electric Energy Act

d) rescind Approval HE 8705 concurrent with the closing of the transfer of the electric

distribution system and related assets to FortisAlberta

69. In stage two, the Commission assessed the prudence of the purchase price to be paid by

FortisAlberta to the Municipality, on the basis that the Commission must establish rates that

provide the distribution utility with a reasonable opportunity to recover its prudent costs to

provide service to its customers. The Commission made a finding that the use of the replacement

cost new less depreciation methodology is reasonable in the circumstances, and also approved

the value of the applied-for replacement cost new amount; however, the Commission did not find

the applied-for depreciation amount to be prudent. Accordingly, the Commission did not find the

applied-for purchase price to be prudent, for rate setting purposes.

70. The transfer of the Municipality’s electric distribution system and related assets may

proceed irrespective of the Commission’s findings with respect to the purchase price agreed to in

the asset purchase agreement. However, given FortisAlberta’s request that the Commission

consider the facility applications and the assessment of the purchase price concurrently in this

proceeding, and the Commission’s determination that it was not able to make a finding in this

decision that the applied-for purchase price was prudent, the Commission places the following

condition on the facilities approvals: FortisAlberta and the Municipality shall advise the

Commission within 90 days of the date of this decision whether they intend to proceed with the

sale and transfer of the electric distribution system and related assets including confirmation of

the purchase price to be paid to the Municipality and the effective date of the transfer. If the

parties advise that they intend to proceed with the transfer, then the Commission will issue the

requisite approvals. If the parties advise that they do not intend to proceed with the transfer, then

the Commission will close applications 21785-A001 and 21785-A002 at that time.

71. For greater clarity regarding the Commission’s findings in its stage two assessment, as

the Commission has not been able to determine that the applied-for purchase price is prudent, for

rate setting purposes, should FortisAlberta pay the Municipality the applied-for purchase price,


14 • Decision 21785-D01-2018 (June 5, 2018)

FortisAlberta will be at risk for recovery of the full amount from ratepayers. However,

FortisAlberta may reapply to the Commission in a compliance filing to this decision for approval

of a revised purchase price determined on the basis of a comprehensive depreciation

methodology that reflects the state of condition, vintage and necessity of the infrastructure assets

to be acquired from the Municipality. Should the Commission find the revised purchase price to

be prudent for rate setting purposes, then FortisAlberta would be free to use this determination in

its application for purchase price recovery in rates as part of the annual PBR rate adjustment

filing.

Dated on June 5, 2018.


(original signed by)

Henry van Egteren

Commission Member

(original signed by)

Mark Kolesar

Vice Chair


Decision 21785-D01-2018 (June 5, 2018) • 15

Appendix A - Proceeding participants

Name of organization

FortisAlberta Inc.

Municipality of Crowsnest Pass

Alberta Utilities Commission Commission panel M. Kolesar, Vice-Chair H. van Egteren, Panel Chair Commission staff

J. Graham (Commission counsel) S. Sinclair (Commission counsel) K. Elkassem A. Jukov

decision 21785-d01-2018-fortisalberta and municipality of ... · calgary, alberta fortisalberta...

Documents