Review and Variance – Prudence
In this decision, an AUC review panel (the “Review Panel”) considered ATCO Pipelines’ claim for a variance of Decision 22986-D01-20181 and Decision 23537-D01-2018. The Review Panel allowed the claim for variance. It approved ATCO Pipelines’ Weld Assessment and Repair Program costs to be included in its opening rate base for 2017 and its forecast capital costs for 2017 and 2018. ATCO Pipelines was directed to reflect the findings of this decision in its next general rate application.
In Decision 22986-D01-2018 (the ”First Compliance Decision”), the AUC denied ATCO Pipelines 100 percent of its reinspection costs associated with its Weld Assessment and Repair Program (“WARP”). The AUC directed ATCO Pipelines to remove the 2016 reinspection costs from its 2017 opening rate base and the forecast 2017 and 2018 reinspection capital expenditures from its 2017-2018 revenue requirements.
In Decision 23537-D01-2018 (the “Second Compliance Decision”), the AUC denied ATCO Pipelines 100 percent of the incremental repair costs arising from the deficient inspections (the “incremental WARP repair costs”).
The AUC granted reviews of both decisions and held a written hearing regarding ATCO Pipeline’s applications for review and variance.
ATCO Pipelines commenced the digitization of its radiographic films in late 2014. In September 2015, a deficient radiographic film was discovered, and ATCO Pipelines initiated an investigation. On May 3, 2016, ATCO Pipelines filed a voluntary self-disclosure letter with the AUC and the AER, which disclosed that certain of its contracted radiographic inspectors had failed to identify or flag for remedial action, the presence of rejectable defects within pre-fabrication welds from 2008 to 2015. To remedy the radiographic inspectors’ deficient work, ATCO Pipelines indicated that it would assess affected pre-fabricated welds that were made between 2008 and 2015. An independent third party was retained to review a significant sample (approximately 13,000 radiographic inspections) of the radiographic work performed for ATCO Pipelines.
In a later proceeding, ATCO Pipelines advised that it was initiating a program to conduct an assessment of all in-service pre-fabrication welds identified that had the potential to contain deficiencies as a result of an insufficient radiographic inspection. Any weld deemed unacceptable, following an engineering critical assessment, would be remediated or replaced. It also was pursuing legal action against the radiographic inspection companies and their radiographers for the deficient inspections. ATCO Pipelines proposed that any litigation proceeds that may be received would be used to reduce ATCO Pipelines’ rate base and revenue requirement.
At that time, ATCO Pipelines estimated the total cost of the program to be $18.874 million. The AUC denied those costs, leading to the applications for review and variance.
The AUC’s approach at Stage 2 of the review process
The Review Panel noted that in a Stage 2 proceeding, the Stage 2 panel must consider the record of the original proceeding in light of the error determined to exist in the findings of the hearing panel in the Stage 1 proceeding (or in light of the previously unavailable facts or changed circumstances accepted by the review panel) to determine if the original decision should be confirmed, varied or rescinded because of the demonstrated error. In making that determination, the Stage 2 panel considers the relevant portions of the record in the original proceeding as well as any supplemental evidence and additional submissions made in the Stage 2 proceeding, which the Stage 2 panel determines to be necessary in the circumstances. This approach is consistent with other Stage 2 decisions issued by the AUC.
The test to be applied by the AUC when considering the application
The Review Panel noted that relative to this proceeding, its primary mandate required it to determine just and reasonable rates. The Review Panel also noted section 44(3) of the Gas Utilities Act places the onus on the applicant to show that its actions were prudent. If the applicant fails to discharge its onus, the AUC has the discretion to disallow costs in revenue requirement. The AUC’s exercise of that discretion is also based on the evidence before it.
The Review Panel found that ATCO Pipelines demonstrated the prudence of its decisions and actions prior to and following its discovery of the deficient radiographs in September 2015. Based on these findings, the Review Panel considered that a variance of the compliance decisions was warranted.
2008 to September 2015
The Review Panel noted that ATCO Pipelines had an obligation to ensure the safe and efficient delivery of service and manage the risks associated with the provision of service, including the risks inherent to contracting work to third parties.
The Review Panel accepted ATCO Pipelines’ view that hiring accredited, certified third-party radiographers offered reasonable assurance that those engaged had the requisite qualifications and skill to perform the work properly. The Review Panel also agreed that the internal quality control programs of the third party radiographic contractors, and the fact that the radiographers were regulated, offered a measure of oversight of the radiographers’ activities.
The Review Panel further accepted as reasonable the rationale offered by ATCO Pipelines for its assessment that further measures, including periodic, third-party monitoring of the radiographic inspections, were not warranted from 2008 to September 2015.
The Review Panel held that it could not determine, given the evidence in this proceeding, that earlier standards were suboptimal given the circumstances facing the industry in the past, including the state of knowledge of risk and the magnitude of potential harms, based on practices following the discovery of the deficient welds.
The Review Panel also agreed with ATCO Pipelines that reliance on the evolution of practices, or the dynamics of industry practices and procedures, as evidence of the imprudence of past practices may have a chilling effect on the evolution of such practices, and on the willingness of companies to self-disclose events such as those giving rise to this proceeding. Such consequences, while unintended, would be undesirable and ultimately contrary to public safety and the public interest in general.
With respect to the period post-September 2015, the Review Panel found that, following the discovery of the deficient radiographic inspections up to and including the 2017-2018 test years, ATCO Pipelines exercised good judgment, made reasonable decisions and took prudent actions. The Review Panel also found that ATCO Pipelines took into account the best interests of its customers, based on the information that it knew or ought to have known at that time.
Hearing panel’s error
In reaching the above determinations concerning the whole of the relevant time period, the Review Panel acknowledged the reversal of earlier AUC findings concerning the recoverability of the WARP reinspection and repair costs in the compliance decisions and considered it important to highlight the following. As was identified in the decisions granting Stage 1 review in respect of each of the compliance decisions, the error of the hearing panel in the First Compliance Decision was its principal reliance on the argument put forth by interveners based on the actions taken by ATCO Pipelines subsequent to the discovery of the deficient weld inspections, as the basis for what actions ATCO Pipelines should have taken prior to discovering the deficiencies. That determination informed the hearing panel’s assessment of the prudence of ATCO Pipelines’ actions during the period from 2008 to September 2015 and of the resulting reinspection and repair costs.
Variance of the compliance decisions
The Review Panel found that a variance of the compliance decisions was warranted. It approved ATCO Pipelines’ WARP capital project and related costs. ATCO Pipelines was directed to adjust its opening rate base and revenue requirements in its next GRA to reflect the AUC’s approval of ATCO Pipelines’ capitalized 2016 actual and forecast 2017-2018 reinspection and incremental repair costs to be included in its 2017-2018 revenue requirement.