Review and Variance
Original Decisions
In Decision 20552-D01-2015 and Decision 20733-D01-2015 (collectively, the “Original Decisions”) the AUC approved FortisAlberta Inc.’s (“Fortis”) purchase of the assets owned by:
(a) the Kingman Rural Electrification Association Ltd. (“Kingman REA”); and
(b) the V N M Rural Electrification Association Ltd. (“VNM REA”) (collectively, the “REAs”)).
In the Original Decisions, the AUC found the purchase prices paid by Fortis for the Kingman REA assets and the VNM REA assets to be prudent. It denied the Office of the Utilities Consumer Advocate’s (“UCA”) request to participate in the Kingman REA proceeding, Proceeding 20552, finding “… should the application be approved, any adjustment to Fortis customers’ rates arising as a consequence would be addressed in a future rates application.”
Decision 20818-D01-2015
Fortis applied to recover its costs to purchase the REAs in Proceeding 20818. The UCA intervened to contest the claimed amounts. The AUC rejected the UCA’s position, finding that the prudence of these costs had been already determined by the AUC based on the methodology in the Original Decisions, and that “these issues are not subject to reconsideration within the context of Fortis’ annual rate adjustment proceeding.”
UCA Review Application
The UCA requested that the Commission review and vary Decision 20818-D01-2015. In Decision 21339-D01-2016, the AUC denied the UCA request to review Decision 20818-D01-2015, but instead initiated its own review of the Original Decisions, finding that:
(a) the combined (and seemingly unintended) effect of the AUC’s decision in Proceeding 20552 to deny the UCA standing while also deeming the Kingman REA acquisition cost to have been prudently incurred was to potentially impede the UCA’s ability to intervene on the question of resultant rate impacts; and
(b) while the AUC denied the UCA’s review request, it initiated its own review and variance proceeding of the Original Decisions to allow the UCA to make submissions as to whether the Kingman REA and the VNM REA acquisition costs were prudently incurred.
Legislative Scheme
The AUC explained that:
(a) the Rural Utilities Act (the “RUA”) sets out the requirements for an REA seeking to discontinue operations and sell its facilities;
(b) Section 23 of the RUA provides that an REA, by extraordinary resolution, may authorize the sale of its entire works to a utility company; and
(c) following authorization by resolution, the REA must obtain AUC approval of the sale.
Approval of Sale of Prudent Acquisition Cost
The AUC explained that provisions in the Hydro and Electric Energy Act (“HEAA”) also address the sale of REA assets to distribution utilities:
(a) Section 29(4) of the HEEA provides that where parties are unable to agree on a price, the AUC will make the determination based on evaluating the facilities that comprise the REA’s distribution system using the reproduction methodology; and
(b) Section 32(1) of the HEEA provides for the AUC to transfer to another entity the service area of an REA directed to cease operations under section 29, or authorized to discontinue operations under section 30.
Under the scheme governing the sale of REAs, the AUC must first determine whether the price paid by the distribution company (in this case Fortis) for REA assets was prudent. Once the AUC determines the cost of an REA acquisition to be prudent, the distribution utility may apply for an adjustment of its rates.
Issues Subject to Review
In this proceeding, the AUC reviewed the original panels’ determinations in the Original Decisions regarding the prudence of the costs paid by Fortis for the acquisition of the REA assets. In particular, the AUC considered the following issues:
(a) What methodology is permitted, replacement cost new minus depreciation (replacement methodology) or reproduction cost new minus depreciation (reproduction methodology), to set the purchase price for the REAs?
(b) Was the methodology applied by Fortis prudent?
Issue 1: What methodology is permitted, replacement methodology or reproduction methodology, to set the purchase price for the REAs?
In this instance, the REAs and Fortis reached an agreement on the purchase price.
The AUC found that an REA and an incumbent utility may agree on a price using any method that they choose. Section 32 of the HEEA provides no express prohibition on a distribution utility and an REA agreeing on any pricing methodology that they deem fit, including the replacement methodology, which the parties relied on in this case.
The AUC explained that the primary difference is that reproduction cost refers to the present-day cost of building an asset with identical materials and quality of workmanship as the subject asset. Whereas, replacement cost refers to the present-day cost of replacing the subject assets with ones having exactly the same utility, but built to present-day standards, which may include the use of new technology and materials.
The AUC found that Fortis applying the replacement methodology to determine the purchase price of both Kingman and VNM REAs was reasonable for the following reasons:
(a) given the age, and the technical specifications of the REAs’ distributions systems, estimating the cost of the REAs’ actual systems would likely have been impractical because the reproduction of obsolete equipment is an expensive and onerous exercise, and may result in higher costs in this instance given that obsolete equipment is not readily available;
(b) the UCA was unable to put forward any other practical valuation methodology that could have been applied in this instance; and
(c) given the vintage of the assets being acquired by Fortis, the application of the calculated depreciation to the replacement value of these assets should serve to largely protect ratepayers from paying for older assets at the prices of an upgraded system (i.e., the replacement value).
Issue 2: Was the methodology applied by Fortis prudent?
The AUC went on to evaluate the prudence of the purchase price based on the replacement methodology used by the parties.
A utility will be found prudent if it exercises good judgment and makes decisions which are reasonable at the time they are made, based on information the owner of the utility knew or ought to have known at the time the decision was made.
The AUC accepted the calculations performed by Fortis for all the asset groups in the REAs’ distribution systems, and found the associated costs to be prudently incurred, with the exception of the calculation of costs associated with easements.
Considering Easement Costs
The AUC found that Fortis should only have compensated Kingman and VNM REAs for assigned land rights for the portion of the lines that were actually installed on private landowners’ land. The AUC found unreasonable Fortis’ assumption that all primary lines systems were installed on private landowners’ land and therefore not an adequate assumption for the purposes of estimating a value for the land rights assigned from the REAs to Fortis.
Accordingly, the AUC found that the portion of the costs assignable to the estimate of the acquisition of land rights should reflect the actual portion of the lines that are installed on private lands.
The AUC directed Fortis, in the compliance filing, to re-estimate the value of the land rights acquired from the REAs by providing an accurate accounting for the portion of the lines that are actually installed on private land.
