Rates – Licence Fees – Tax
ATCO Electric Transmission, ATCO Electric Ltd, and ATCO Pipelines, a division of ATCO Gas and Pipelines Ltd. (collectively, “ATCO”), pursuant to a direction from the AUC, applied for a joint licence fee application to include in ATCO’s respective revenue requirements, amounts corresponding to licence fees they are required to pay to ATCO Ltd. for the use of intangibles and associated benefits that ATCO receives from ATCO Ltd. Each of the ATCO companies forecast the following licence fees, respectively:
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ATCO Electric Transmission – $2.7 million in 2015, $3.1 million in 2016 and $4.7 million in 2017; and
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ATCO Pipelines – $0.6 million in 2015, $0.7 million in 2016.
These amounts had previously been made subject to placeholder treatment by the AUC.
Originally, in Proceeding 3577, ATCO Pipelines, on behalf of itself and Gowling Lafleur Henderson LLP asserted that there was a domestic Income Tax Act obligation requiring ATCO Ltd. to charge licence fees to ATCO Pipelines under section n247 of that enactment.
As a result of objections filed by the Utilities Consumer Advocate (“UCA”) the AUC initiated a separate process to consider the income tax obligations of ATCO with respect to licence fees.
ATCO submitted that the licence fees are intended to compensate ATCO Ltd. for its subsidiaries’ use of intangibles and benefits that they receive as a result of their relationship to the parent corporation. ATCO submitted that the intangibles included purchasing power benefits, economies of scale, as well as use of the ATCO name, trademarks, intellectual property, and know-how.
ATCO Ltd. imposed licence fees on all of its subsidiaries on January 1, 2015 commensurate with the fair market value of benefits received, which ATCO Ltd. set at one percent of operating profit of the applicable subsidiary. ATCO submitted that these fees were established to comply with Canadian tax law requirements to ensure that it realizes fair market value for benefits it provides to subsidiaries, using transfer pricing concepts.
ATCO submitted that their request to include licence fee amounts in revenue requirements was justified, as the net benefits customers derived far outweighed the licence fee amounts. ATCO noted that analyses performed by Ernst & Young as well as Aon Canada estimated the financing and insurance cost savings between $4.4 and $10.5 million annually for each subsidiary for financing costs, and between $1.1 and $1.6 million for leveraging purchasing power.
ATCO argued that the payment of licence fees was consistent with the expectation that utilities seek cost efficiencies that result in net benefits to customers in providing utility services. In accordance with the stand-alone principle, ATCO submitted that the licence fees guarded against cross-subsidization between ATCO’s various affiliates.
The Consumers’ Coalition of Alberta (“CCA”) stated the issue before the AUC as being whether amounts paid by ATCO to ATCO Ltd. should be included in the companies’ respective revenue requirements. The CCA argued that the proposed licence fee is not supported by any costs, nor was it required for utility service, and that no risk of tax liability arises if customers do not pay the licence fee. The CCA submitted that ATCO was already paying their share of costs through corporate allocations which are included in the revenue requirement. The CCA further argued that the tax obligations cited by ATCO apply to transfer pricing on intangible property for cross-border transaction, not domestic inter-affiliate transactions. Accordingly, the CCA requested that the application be dismissed, and the amounts excluded from the companies’ respective revenue requirements.
The City of Calgary similarly opposed the application, arguing that ATCO failed to demonstrate that the requested costs were just and reasonable, or required for the provision of utility service. Both Calgary and the CCA expressed concern that ATCO simply accepted the licence fees being imposed upon it by ATCO Ltd., and did not seek independent legal advice on the imposition.
The UCA submitted that the licence fee was not a true cost and was not prudently incurred by ATCO. The UCA submitted that ATCO did not demonstrate that the value to ratepayers from the use of the ATCO name, trademarks, intellectual property, and know-how. The UCA argued that once the double counting of management expertise was accounted for, the only remaining value would be for trademarks and advertising benefits. However, the UCA argued that such benefits were in fact unnecessary in a monopoly service with a captive customer base, and therefore questioned the legitimacy of the expenses.
The UCA also argued that, even if the Income Tax Act did require the payment of licence fees, the UCA argued that any obligation to do so would arise from ATCO’s own choice of corporate structure. Accordingly, if ATCO had structured under a single corporation, the costs of licence fees would be zero. Therefore the UCA argued that such costs should be denied, as they are voluntary on ATCO’s part.
The AUC held that customers should pay no more than what is necessary to receive service, citing the Supreme Court of Canada in ATCO Gas and Pipelines Ltd. v. Alberta (Utilities Commission).
Based on the evidence provided, the AUC determined that section 247 of the Income Tax Act did not impose a requirement on ATCO Ltd. to charge its domestic subsidiaries a licence fee. The AUC accordingly rejected that ATCO would be exposed to tax liability as a result of any failure to impose such a licence fee.
The AUC held that ATCO’s valuation methodology for patents, goodwill and advertising trademarks were problematic, as it failed to explain how such benefits are necessary for and valuable to a monopoly service such as ATCO’s. Accordingly, the AUC assigned ATCO’s evidence in this regard only minimal weighting. As a result, the AUC was not persuaded that licence fees were any different from corporate signature rights, which it noted had previously been denied inclusion into revenue requirement.
With respect to ATCO’s submissions on group economy benefits, the AUC held that it was incumbent on ATCO to provide a consideration of all of the costs and benefits of the relationship between ATCO and ATCO Ltd., holding that absent a complete picture of such costs and benefits, there is a strong likelihood that the inclusion of such licence fees in revenue requirement would not constitute just and reasonable rates.
The AUC held that the licence fees payable by ATCO did not constitute costs reasonable incurred for the provision of utility services. Additionally, any question of whether or not ATCO Ltd. was obligated to charge the licence fee was, in the AUC’s determination, not dispositive of whether the amounts paid by ATCO should be included in revenue requirements. The AUC determined that ATCO had given no effort to critically assess or otherwise understand or obtain independent legal advice on ATCO Ltd.’s valuation of the licence fee with a view to obtaining fair market value for their own customers. The AUC held that such behaviour was inconsistent with what might be reasonably expected of a standalone entity. Accordingly the AUC denied ATCO’s application in its entirety.
The AUC directed ATCO to remove the licence fees costs/placeholders from their respective revenue requirements.
