Electricity – Purchase Price Consideration – Transfer and Sale of Electric Distribution System
In this decision, the AUC considered a FortisAlberta Inc. (“Fortis”) application to recover the acquisition costs for the purchase of the Town of Fort Macleod’s (“Fort Macleod” or “Town”) electric distribution system (the “transaction”) through rates. The AUC found the replacement cost new less depreciation (“RCN-D”) valuation methodology to be reasonable in the circumstances.
On October 12, 2018, Fortis filed an application seeking AUC approval to recover the acquisition costs for the purchase of Fort Macleod’s electric distribution system, pursuant to the terms of a March 12, 2018 asset purchase agreement between the two parties. Fortis determined the $4.69 million purchase price associated with the transaction by applying the RCN-D valuation methodology. The purchase price was calculated as the difference between the RCN value, calculated as $8.84 million, and the D value, calculated as $4.15 million.
Is Use of RCN-D to Determine the Purchase Price Reasonable in the Circumstances?
Fortis determined the $4.69 million purchase price associated with the transaction by applying the RCN-D valuation methodology.
Interveners recommended utilizing the net book value (“NBV”) approach as an alternate technique of valuing the purchase price for Fort Macleod’s electric distribution system assets. The AUC acknowledged that the NBV, if properly derived based on accounting principles, can provide for a reasonable accounting of the historical costs incurred by Fort Macleod. However, the AUC had reservations regarding the adequacy of the derived NBV information provided by Fort Macleod. While Fortis was provided with certain basic financial information related to the operation of Fort Macleod’s electric distribution system, Fortis stated that Fort Macleod was “unable to provide the Company [Fortis] with documentation related to the past or current operation and maintenance of its electric distribution system e.g., maintenance logs or asset records.” The AUC stated that, in its view, the absence of good documentation practices indicates a material risk that implemented maintenance (if any) and associated expense was not adequately accounted for, resulting in the incompleteness of not only maintenance records, but also financial documentation of maintenance.
The AUC found that Fortis provided sufficient evidence to demonstrate that the RCN-D methodology, as utilized by Fortis, was a reasonable approach in valuing the electric distribution system assets in the context of the transaction between Fortis and Fort Macleod. While Fortis had not previously maintained and operated these assets, and therefore did not have historical asset records or past knowledge of the systems and information available, the AUC considered that Fortis’s approach, which included a comprehensive on-site assessment of Fort Macleod’s system, and application of Fortis’s unit-based estimating tool, based on current construction and engineering standards with an associated labour cost, to be reasonable for calculating the purchase price of Fort Macleod’s electric distribution system in the circumstances. The AUC noted that a key consideration for its finding was the absence of any other valuation methodology on the record of this proceeding that the AUC considered could have been reasonably applied in this instance.
Does the Specific Calculation of RCN-D Require Adjustment?
In the event that the AUC approved the RCN-D valuation as reasonable, interveners submitted that adjustments to the D component were necessary.
While the AUC considered that there was potential merit to an adjustment to RCN-D to account for future liabilities associated with asset removal and site restoration, the AUC indicated it was unable to find in this proceeding that an adjustment should be made. In particular, the AUC emphasized the uncertainty regarding the scale of future liabilities of this transaction. The AUC ultimately found no reasonable basis to apply any incremental adjustments to the applied for RCN-D amount.