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EPCOR Distribution & Transmission Inc., Disposition of the South Training Centre, AUC Decision 25443-D01-2020

Link to Decision Summarized

Facilities – Disposition Application


In this decision, the AUC considered an application from EPCOR Distribution & Transmission Inc. (“EDTI”) for the disposition of its South Training Centre (“STC”). The AUC approved EDTI’s application to dispose of the STC property and found that the transaction was outside the ordinary course of business.

Background

In the application, EDTI requested approval to dispose of the STC property, which includes the land, a building, a fenced yard, and a parking lot (the “STC property”). The STC property was used by EDTI as an employee office space, indoor classroom space, and an outdoor, field-based training facility.

Neither training facility space nor materials storage at the STC property is currently required by EDTI, and EDTI explained the STC property is no longer required for the provision of electric utility service.

Legislation

As a designated owner of a public utility pursuant to section 101(1) of the Public Utilities Act and its designation regulation, EDTI is subject to section 101(2) of the Public Utilities Act, which states:

101(1) The Lieutenant Governor in Council may by regulation designate those owners of public utilities to which this section and section 102 apply.

(2) No owner of a public utility designated under subsection (1) shall …

(d) without the approval of the Commission,

(i) sell, lease, mortgage or otherwise dispose of or encumber its property, franchises, privileges or rights, or any part of them, or

(ii) merge or consolidate its property, franchises, privileges or rights, or any part of them,

and a sale, lease, mortgage, disposition, encumbrance, merger or consolidation made in contravention of this clause is void, but nothing in this clause shall be construed to prevent in any way the sale, lease, mortgage, disposition, encumbrance, merger or consolidation of any of the property of an owner of a public utility designated under subsection (1) in the ordinary course of the owner’s business.

EDTI is a designated owner of a public utility pursuant to section 1(1)(n) of the Public Utilities Designation Regulation. Accordingly, section 101(2)(d) applies to EDTI.

AUC Findings

Ordinary Course of Business

The AUC noted that section 101(2)(d) of the Public Utilities Act prevents a designated owner of a public utility from disposing of assets outside the ordinary course of the owner’s business without first obtaining the approval of the AUC. Any disposition without such prior approval is void.

In Order U2001-196, the AUC’s predecessor outlined the criteria to be used in determining whether the disposition of an asset should be treated as being outside the ordinary course of business, as follows:

… The Board confirms that it must first determine whether the disposition of an asset is outside the ordinary course of business for a utility. The proceeds of disposition, NBV [net book value], frequency and type of sale would be among the factors considered by the Board in that determination. The quantum, and materiality (in relation to the total rate base) of the proceeds of disposition and the NBV would all be considered. For example in this case, the NBV of $2,163,801 would be at the bottom end of the range of dispositions the Board would consider as outside the ordinary course of business. With respect to the frequency and type of sale the Board does not agree with NGTL [NOVA Gas Transmission Ltd.] that acquiring and divesting regional service centres, maintenance facilities, and field offices are necessarily in the ordinary course of NGTL’s business. The Board considers that NGTL’s ordinary business is the owning and operating of a pipeline, not the acquiring and divesting of real estate.

… The final determination whether a disposition is outside the ordinary course continues to rest with the Board.

The AUC agreed with the principle outlined by the board in Order U2001-196 that the ordinary business of a utility is not the acquiring and divesting of real estate. The AUC found that EDTI’s proposed sale of the STC property was outside the ordinary course of EDTI’s business and the disposition required AUC approval under section 101(2)(d) of the Public Utilities Act.

Materiality

The AUC stated that, concerning the criterion of materiality, which is one of the factors identified in Order U2001-196, the materiality of the transaction, in part, relates to the proceeds of disposition in relation to the total rate base.

EDTI submitted that the estimated sale price of the assets under consideration in this application of $1.80 million is consistent with the range of values in dispositions previously approved by the AUC as outside the ordinary course of EDTI’s business.

The AUC noted that dispositions approved by the AUC have ranged from a sale price of $0.10 million to $2.26 million. The AUC considered that the amount of the disposition for the STC property is material in respect of the sale price and the net sale proceeds based on the amounts provided in the application.

Frequency

Other criteria identified in Order U2001-196 include frequency of the disposition and the type of sale. EDTI stated it engages in these types of transactions infrequently and only when a property is no longer required for its ordinary course of business, which is the provision of electric utility service.

EDTI explained that eight applications for disposition have been approved or applied for since 2006, yielding a ratio of one disposition every 1.8 years during that period. As discussed in Proceeding 25442, EDTI Substation Disposition, four more EDTI substations are anticipated to be decommissioned in the next three years. Assuming each one results in a disposition application, it would lower the aforementioned ratio to one disposition every 1.4 years.

The AUC stated that assuming that four more disposition applications will be received by EDTI in the next three years for 5-kV substation dispositions, from the period of 2017 to 2023, the ratio will be approaching 1.0 disposition application per year. This level of frequency shows that these transactions are not infrequent. In the future, similar disposition applications may be considered to be within the ordinary course of business, as a more common occurrence for EDTI.

Assessment of Harm

In deciding whether to approve a disposition application that is outside the ordinary course of business under section 101(2)(d) of the Public Utilities Act, the AUC and its predecessor have traditionally applied a “no-harm” test that considers the tra
nsaction in the context of both potential financial impacts and service level impacts, in terms of both quantity and quality, to customers.

An application of the no-harm test requires the AUC to consider whether or not the transaction will adversely affect the quantity or quality of service or customer rates.

The AUC found that, in respect of service level impacts, the STC property is no longer required for the provision of electricity service, and therefore the AUC found the proposed disposition will have no adverse effect on the quality and quantity of utility service, and the disposition will not create any adverse financial impact to ratepayers.

Concerning customer rates, the AUC found that, given that EDTI is proposing to dispose of the STC property at its fair market value and that ratepayers will bear no costs arising from its disposal, including costs for environmental assessment and remediation costs, land appraisal fees, land agent fees, and legal fees will be absorbed by the utility, the disposition of the STC property will not result in harm to customers. The AUC noted that the STC property is no longer required for the provision of electricity service and will be removed from rate base effective December 31, 2022.

The AUC found that the proposed disposition of the STC property satisfies the no-harm test.

Adjustment Due to Disposition

In the application, EDTI stated that “If the application is approved, and to the extent it is consistent with the method of rebasing chosen by the AUC for the next generation of PBR for EDTI, EDTI proposes to remove the property from its rate base prior to the end of the current PBR term.”

The AUC noted that is was concerned about the timing of when EDTI management determined the STC property ceased to be used for the provision of electrical utility service. EDTI has been warned by the AUC previously on requiring too much time to decide on the disposition of assets. Had the STC property been found to be no longer required for utility service in 2017, when EDTI had vacated the property, its capital costs should not have been reflected in EDTI’s performance-based regulation (“PBR”) rates during the current term of 2018-2022. The AUC considered EDTI’s reasons as to why it waited until 2020 to bring this disposition application forward:

(a)      EDTI had only recently determined that the STC property would not be required for EDTI’s utility operations in the future, as EDTI had not yet determined its ongoing need for other operations centres.

(b)      The current use of the STC property would conclude at the end of this year. The current use included in-class training programs, which are attended by EDTI employees. EDTI stated these courses, such as safety training, mental health awareness training, and fleet services training continues to be required to ensure that EDTI’s employees are competent to carry out their duties, which is, in turn, required to ensure that EDTI meets its statutory obligation to provide safe, reliable and economic utility service, and complies with its obligations as an employer in Alberta. EDTI stated that at the end of 2020, it would no longer conduct these training programs from the STC property.

The AUC considered these reasons for delay were not fully persuasive. However, the AUC weighed the minor rate impact of rebating to ratepayers a relatively small amount of return on rate base in question (approximately $30,000 per year), against the predominant goal of reducing regulatory burden and streamlining regulatory proceedings. The AUC decided that it would not create a further regulatory process to alter the date of removal of the property from utility service to an earlier year.

The AUC considered that removal of assets from rate base at the end of the PBR term would be consistent with the AUC’s findings in other EDTI disposition applications. Due to EDTI’s lack of use of the STC property, the timing of EDTI’s application, and given that the PBR term is set to expire at the end of 2022, EDTI’s proposal to remove the net book value of the STC property from rate base on December 31, 2022, is consistent with past directions. Accordingly, the AUC directed EDTI to remove the book value of the STC property from its rate base, effective December 31, 2022.

The AUC also found that all net proceeds of sale and any net gains arising from the disposition are to be for the account of the utility shareholders, in accordance with Stores Block.

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