Direct Assign Capital Deferral Account Audit

This proceeding and decision arose out of AltaLink Managment Ltd.’s (“AltaLink”) 2010-2011 direct assign capital deferral account (“DACDA”) application considered as part of Decision 2013-407. In that decision, the AUC ordered an independent audit for AltaLink’s costs associated with the Southwest 240kV Project (the “SW Project”). The AUC held that the evidence on the record was not sufficiently detailed for the AUC to make a final prudence assessment of the SW Project, approving instead a placeholder for the SW Project. The AUC retained Midgard Consulting Inc. (“Midgard”) to perform an independent audit, which was filed on the record of this proceeding (the “Midgard Report”).

The SW Project is a 240-kV double circuit transmission line and transmission system reinforcement project extending from Lethbridge, Alberta to Pincher Creek, Alberta. In Decision 2013-407, the AUC noted that the initial estimate in AltaLink’s proposal to provide services in 2005 (“2005 PPS”) for the SW Project was approximately $78 million, while the final cost of the SW Project, filed as part of the DACDA application, was approximately $224 million.

Procedural Background

Prior to determining the substantive issue of the prudence of AltaLink’s SW Project costs, the AUC considered the following procedural issues in the proceeding:

(a) Legislative Scheme;

(b) Participation of Piikani Resource Development Ltd. (“PRDL”);

(c) Relationship between the Midgard Report and the AUC’s prudence assessment;

(d) Impartiality of Midgard;

(e) Scope of the Midgard Report; and

(f) Information available for the audit.

As part of the procedural background to the proceeding, the AUC canvassed the legislative framework applicable to project costs for transmission facility owners (“TFOs”). The AUC also reviewed ISO Rule 9.1 – Compliance Monitoring, which includes a number of project reporting and project procurement practices. As part of that review, the AUC stated that the Alberta Electric System Operator (“AESO”), while it has a significant impact on TFOs, does not have a mandate to assess prudence of project costs. The AUC determined that this mandate falls squarely within the AUC’s own authority to set just and reasonable rates. As a practical matter however, the AUC noted that the AESO’s actions frequently have a significant bearing upon the AUC’s assessment of the prudence of project costs.

With respect to the participation of PRDL, the AUC noted that PRDL (a wholly owned corporation of the Piikani Nation) did not participate in the initial proceeding leading to Decision 2013-407. However, PRDL registered to participate in this proceeding, noting that PRDL holds the right to purchase an equity stake in the portion of the SW Project that traverses the Piikani reserve.

The Consumers’ Coalition of Alberta (“CCA”), while it did not oppose PRDL’s participation, urged the AUC to disregard, or give little weight to the submissions of PRDL, given their alignment with AltaLink’s interests in requesting a finding that the SW Project costs were prudently incurred. The AUC rejected the CCA’s submission that PRDL’s submissions be given little weight on the basis that the AUC assigns weight to evidence, not argument.

With respect to the relationship between the Midgard Report and the AUC’s mandate to assess prudence, PRDL submitted that section 122(1) of the Electric Utilities Act required the AUC to allow a utility a reasonable opportunity to recover prudently incurred capital costs. PRDL further submitted that recent jurisprudence from the Supreme Court of Canada did not require the application of a specific methodology to assess prudence, but an appropriate test for the prudence review would be the no-hindsight test.

The AUC held that Midgard’s practice of not imposing a “20/20 hindsight” standard was compliant with the AUC’s direction to audit the SW Project in Decision 2013-407.

The AUC emphasized that Midgard’s practice was distinct from the AUC’s own application of a prudence test, as Midgard was not retained to assess prudence.

The AUC also held that the recent decisions from the Supreme Court of Canada affirmed that the AUC may select the test it considers applicable in the circumstances, and accordingly held that Decision 2001-110 would continue to apply for prudence assessments. Decisions on prudence must reflect the information a TFO knew or ought to have known at the time.

With respect to Midgard’s impartiality, the AUC held that the testimony of the witness from Midgard established that Midgard maintained its independence throughout the development of the Midgard Report.

The AUC held with respect to the audit scope, that it clearly set out the scope in Decision 2013-407, holding that “the choice of reverting to an alternate route will not be included in the scope of the audit.”

The AUC determined that Midgard considering the cost of another route did not mean that Midgard proposed an actual alternate route, but rather attempted to develop a proxy to benchmark AltaLink’s costs. However, the AUC rejected any comparison to other transmission lines, holding that it could not rely on the proxy developed by Midgard, since the proxy:

(a) Was based on a 2007 forecast of project costs, which had a wide range of accuracy;

(b) Was a longer route, and would have required additional labour, material and was subject to the same escalation rates; and

(c) Was a different route which would have been the subject of landowner opposition, and potential delays occasioned by multiple appeals to the Surface Rights Board.

With respect to the CCA having argued that AltaLink had failed to provide adequate data to Midgard, the AUC noted that Midgard did not raise any concerns with the content of AltaLink’s responses. The AUC was satisfied that Midgard had sufficient information to complete its audit.

Midgard Report

The AUC provided a high level summary of the conclusions in the Midgard Report. Midgard divided the SW Project into three phases: project planning, approval, and execution. Midgard noted that the initial in-service date (“ISD”) was set for February 28, 2007, requiring aggressive timelines after it submitted the proposal to provide services (“PPS”) in June 2005. Midgard stated that it could not find evidence that AltaLink planned the steps necessary to build a transmission line on federally administered lands (i.e. First Nations Indian reserve lands), or that AltaLink understood the risks in proceeding with a right-of-way across federal lands at the time the PPS was submitted.

Midgard noted that the ISD for the SW Project was determined through a “top-down” process, driven by the interconnection needs of wind projects, rather than a “bottom-up” approach driven by the expected duration of project planning, approval and execution. As such, Midgard determined that AltaLink began procurement activities in order to start construction by March 2006. Midgard noted that due to the advanced procurement activities, the procurement and design activities were approximately 80 percent completed by the time the SW Project was halted in late 2006.

Midgard noted that the SW Project marked the first time AltaLink attempted to construct a transmission line across a federal right-of-way. Since the SW Project crossed the Blood Indian Reserve #148 and Piikani Indian Reserve #147, AltaLink required Indian and Northern Affairs Canada (“INAC”) utility permits. A prerequisite to obtaining these permits is the successful completion of an environmental assessment under the Canadian Environmental Assessment Act. The development of terms of reference for the environmental assessment process was not completed until April 2006. The environmental assessment report (“EA”) itself was submitted by AltaLink in October 2006.

In addition to the approval of the EA, Midgard noted that AltaLink required band council resolutions (“BCR”) from the Blood and Piikani Band Councils to approve the detailed right-of-way plan before any INAC permits under section 28(2) of the Indian Act could be issued. Midgard noted that these BCRs were granted at the sole discretion of the Blood and Piikani Band Councils, with no timelines or legal requirements to oblige the issuance of a BCR.

Following the submission of the EA, INAC and other federal agencies began preparing a screening decision report on the EA, which was completed in June 2008. Midgard noted that the EA screening decision was completed approximately 27 months later than planned, and 34 months after AltaLink started its EA field studies in September 2005. Midgard noted that the time required to complete both of both of these activities went far beyond the originally planned approval dates.

BCRs for each of the reserves were provided on July 25, 2008 following the identification of traditional land use sites that required additional route modifications.

Midgard noted that AltaLink negotiated what it called “impact and benefits agreements” (“IBAs”) with the Blood and Piikani Band Councils. This activity, in Midgard’s opinion, extended several years beyond AltaLink’s initially planned schedule.

Midgard stated that construction on the SW Project began on July 13, 2009, and that construction activities on behalf of AltaLink were undertaken by experienced and qualified contractors for large transmission projects. Midgard noted that the monthly construction reports did not document any significant project delays due to lack of available staff, or competence issues. However, Midgard noted a number of delays in construction were caused by environmental restrictions and some non-predictable conditions. These delays, according to Midgard, were exacerbated by AltaLink’s compressed construction schedule that did not allow any schedule float to account for unplanned delays. Midgard itemized these delays as follows:

(a) Blockades on reserve lands;

(b) Re-routes on the Blood and Piikani reserves;

(c) Land access issues outside of reserves;

(d) Weather conditions and storm events; and

(e) Environmental discoveries.

Midgard noted that the initial cost estimate from AltaLink was $78.2 million in the 2005 PPS. At the facilities application stage, TCA 23 (a series of AltaLink documents noting scope and cost changes) projected a total cost of $138.4 million in 2007. Midgard stated that it treated the facilities application (“FA”) estimate as the project baseline for costs, as this was the information available to the AUC in providing its approval of the SW Project in Decision 2009-028.

Midgard noted that TCA 24 was submitted in June 2009, just after approval of the SW Project, and just prior to construction. Midgard noted that TCA 24 contained several cost increases for transmission and substation labor, as well as right-of-way acquisition costs, and increased allowance for funds used during construction (“AFUDC”) and engineering and supervision (“E&S”) costs, totalling a $45.4 million increase.

TCA 25 was the final change document provided by AltaLink, following the first full year of construction, and following the construction shutdown during the bird nesting period. TCA 25 introduced incremental project costs for delays and modifications made to the SW Project through the first year of construction, as well as accounting for delays in construction. The final costs claimed for the project were reported by AltaLink as $224.6 million.

Midgard identified three key turning points in the execution of the SW Project:

(a) Initial Project Planning and Scheduling;

(b) December 2005 and February 2006 Facilities Applications on Reserve Routes; and

(c) August 2007 Consolidated Facilities Application.

Variance from Baseline Costs

The AUC, in providing its reasons on the final prudence determination, cited Decision 2014-283, which provides that a variance from a baseline estimate prepared at the PPS stage is not, in and of itself an indication of imprudence. Rather, the AUC characterized these variances as identifying areas for further investigation into the reasonableness of the owner’s decision making.

Initial ISD

With respect to the initial ISD, the AUC held that projects are typically assigned to a TFO by the AESO, and that the TFO must keep the AESO informed of any issues respecting siting, timing and costs as the TFO becomes aware of them. However, the AUC held that this obligation was not without limitations, noting that the AESO is a sophisticated party with extensive knowledge of the siting and construction of transmission projects, as the Alberta transmission system planner. The AUC also held that the legislative scheme obligates a TFO to comply with the directions of the AESO, unless doing so would put its facilities or the safety of the TFO’s employees or the public at risk. The AUC held that the AESO was aware of AltaLink’s progress in securing INAC permits and other federal approvals. On this basis, the AUC held that AltaLink did not act imprudently, since there was no persuasive evidence on the record that the initial ISD of Febuary 2007 was unreasonable.

Environmental Assessment

With respect to the reasonableness of the environmental assessment planning process and related activities, the AUC noted that the time identified by Midgard as reasonable to obtain federal permitting approvals on First Nation lands was from two to five years.

Although the AUC held that the environmental process took considerably longer than first planned, AltaLink’s efforts in hiring external expert assistance was reasonable in planning the environmental permitting process.

Negotiations with First Nations

With respect to reasonableness of negotiations with First Nations, the AUC noted Midgards’ conclusion that filing the application which would cross First Nations reserves would provide negotiating leverage to the Blood and Piikani First Nations, in knowing that each had an effective right of veto over the planned SW Project route. The AUC also noted that Midgard suggested that holding off on filing such facility applications until the completion of the IBAs would have avoided an erosion of AltaLink’s negotiating position.

Both AltaLink and PRDL submitted that Midgard’s conclusions implied that AltaLink should have withheld information from First Nations to maintain negotiating leverage. Both AltaLink and PRDL submitted that such conclusions should be dismissed out of hand, since such actions would be contrary to law, and would imply that AltaLink advance a demonstrably inferior route to gain leverage over First Nations.

AltaLink also submitted that the Blood and Piikani First Nations continued to express support for the preferred route option on the SW Project throughout the negotiations.

PRDL submitted in argument that the analogies used by Midgard in depicting consultation and negotiation processes with First Nations were concerning. PRDL submitted that Midgard’s likening of the consultation and negotiation process to a “candy toss” or “pushing a chequebook across the table and say[ing] fill in your number” were concerning, and wholly inappropriate.

The AUC held that, payment of access fees to landowners in construction of a transmission project is a cost of doing business. The AUC noted that under provincial processes, such fees are still negotiated with landowners, and may be the subject of proceedings before the Alberta Surface Rights Board. However, the AUC also noted that the Alberta Surface Rights Board does not have the authority to issue a right of entry order across First Nations lands, but that this fact was not unknown to the AESO, AUC or AltaLink in proceeding with the preferred route.

The AUC further held that, based on the facts before it, the Blood and Piikani First Nations, as sophisticated investors, would have had knowledge of the preferred route as early as 2004 with the AESO’s filing of the original needs identification document. The AUC therefore held that AltaLink’s actions in this respect were not imprudent.

AFUDC and E&S Costs

With regard to AFUDC and E&S costs, the AUC noted that prior to the hearing, AltaLink had filed a supplemental analysis dated September 30, 2015 using actually incurred costs of $5.9 million for AFUDC and E&S costs. The AUC noted that Midgard accepted these revised figures as filed, and revised its proposed cost impacts accordingly.

The AUC determined that, while under normal commercial circumstances, it would have been unreasonable for AltaLink to begin material procurement so far in advance of construction. However, the operating environment at the time was such that the AESO was concerned about availability of materials and services, and issued direction letters to AltaLink on February 15, 2006 ordering AltaLink to proceed with early procurement pursuant to section 35 of the Electric Utilities Act. Accordingly, the AUC held that it was clear that the AESO ordered AltaLink to begin early procurement, and that in the circumstances, AltaLink was obligated to comply. As such, the AUC determined that AltaLink’s costs for AFUDC and E&S were prudently incurred.

Timing of Facility Application

The AUC determined that the escalation costs associated with the delays in the SW Project caused by premature filing of the facilities application were prudently incurred as well, holding that AltaLink did what it reasonably could at the time to advance the facilities application and permitting process.

Project Execution and Construction Costs

On matters related to project execution and construction costs, AltaLink submitted that it faced unexpected challenges in executing the SW Project, and that it made management decisions to respond to those challenges. AltaLink’s decisions at the time they were made were reasonable and prudent. AltaLink’s use of helicopters to erect the towers for the SW Project was considered reasonable by Midgard, and that such measures reflected good industry practice when access to construction sites is an issue. AltaLink also noted that Midgard found AltaLink’s decision effectively mitigated increased standby charges for construction crews, and assisted in mitigating further scheduling delays.

AltaLink also submitted that Midgard found AltaLink’s practice of standing down construction crews during blockades was reasonable to protect worker safety.

PRDL submitted that the testimony of Midgard was instructive on the reasonableness of AltaLink’s construction costs, wherein Midgard stated that “construction is war” and that decisions taken by the responsible entity to reduce larger ticket items is a reasonable response.

The AUC determined that AltaLink’s decision to mitigate cost and schedule impact from various blockades by using off-site assembly yards and employing helicopters for transportation produced positive results for the SW Project’s schedule and budget. The AUC also held that AltaLink could not have reasonably foreseen the opposition that subsequently arose during project construction. Accordingly, the AUC held that it could not find that AltaLink’s use of helicopters to maintain its ISD to be imprudent.

Rate Base Addition

The AUC, in making its findings with respect to rate base addition amounts, held that, while the magnitude of the cost variance in this project was a cause for concern, it held that such a variance was not in and of itself an indication of imprudence, but rather an area for further investigation as to the cause and reasonableness of the decision making process.

In finding that AltaLink’s decision making was not imprudent, the AUC held that AltaLink’s claimed costs for the SW Project were therefore approved as filed. The interim amount approved as a placeholder in Decision 2013-407 was therefore approved on a final basis, and AltaLink was not required to provide any further reconciliation of SW Project amounts.