Prudence of Costs – Indigenous Cooperation Agreements
In this decision, the AUC determined that not all costs applied for in the deferral account reconciliation application by AltaLink Management Ltd. (“AML”) and TransAlta Corporation (“TransAlta”) were prudently incurred. The AUC did not approve all of the applied-for rate base capital additions for the Edmonton Region 240 kilovolt (“kV”) Upgrades Project (the “Project”).
AML and TransAlta applied for approval of final capital costs for the Project of $90.9 million for AML and $21.6 million for TransAlta.
The AUC found that AML and TransAlta did not prudently plan and execute 8 kilometres (“km”) of Project, constructed across Stoney Plain Reserve #135 (the “Reserve”). The AUC disallowed fifteen percent of the costs associated with the construction of this section of transmission line, net of the costs of the Cooperation Agreement. The AUC disallowed a similar percentage of the costs incurred by the utilities to negotiate and conclude the Cooperation Agreement. The total amount disallowed in the decision was approximately $3 million, which represents slightly less than one percent of the total capital additions requested.
The Project consisted of the construction of a 240 kilovolt (“kV”) transmission line 1043L located between Keephills 320P Substation and the Jack Fish Lake area west of Edmonton. The portion of the Project that was the subject of this application, the 1043L line included a new 12 km 1043L double-circuit 240 kV line from the 240 kV junction to Jackfish Lake. Also part of this proceeding was the rebuild of 904L consisting of 50 km of single-circuit 240 kV H‐Frame line from Jackfish Lake to Petrolia 816S Substation. The rebuild portion of the project scope included the 8 km of line within the existing right of way (“ROW”) on the Reserve. The rebuild of transmission line 904L was renamed 1043L.
The Project and associated costs were divided into two portions: 1043L (the portion of the Project not on the Reserve, 54 km) and 1043L-Reserve (the 8 km portion of the Project on the Reserve).
TransAlta was the transmission facility owner (“TFO”) of 1043L-Reserve. AML and TransAlta have an Operations and Maintenance Agreement in which AltaLink provided certain operation and maintenance services for transmission facilities located on First Nations’ reserves including the Enoch Cree First Nation’s (“Enoch”) reserve.
Construction on 1043L, began in October 2011, following approval of the Project by the AUC. Construction on 1043L-Reserve began in December 2011 and stopped in May 2012 at the request of Enoch’s Chief and Council, who stated they had concerns about the Project. Following the resolution of land access disputes, which included a Cooperation Agreement with Enoch, the Project was completed on September 29, 2016 and 1043L was energized.
Direct Assigned Deferral Account Application
In its direct assign capital deferral account (“DACDA”) reconciliation application AML requested an approval and reconciliation of capital additions to December 31, 2018, totalling $90.9 million in respect of the Project. Within the same proceeding, TransAlta filed its DACDA. It relied on relevant exhibits previously filed within TransAlta’s 2015-2016 general tariff application (“GTA”), and TransAlta’s 2017-2018 GTA.
In this application, AML sought approval of $90.9 million in costs. TransAlta applied for approval of $21.6 million in costs. The AUC previously directed that TransAlta’s proposed reconciliation of its capital deferral account for the Project be examined, together with AML’s capital costs on the same project, in a single proceeding. The AUC approved three placeholders for 2016: a capital addition of $19,017,065; a portion for an allowance for funds used during construction (“AFUDC”); and $280,000 as an operating cost.
For 2017 and 2018, the AUC approved placeholders for the project including trailing costs of $23,000 and a credit adjustment of negative $521,000. These would reflect that costs originally capitalized to the Project had either been reallocated as salvage costs or reassigned as an AML cost. The AUC further approved the inclusion of the $ 280,000 payments to Enoch for each of the years 2017 and 2018 as part of TransAlta’s revenue requirement for those years on a placeholder basis.
As of December 31, 2018, the Project had incurred actual costs of $135.1 million. AML’s portion of those costs totalled $113.6 million.
Prudency Assessment of Costs
1043L – Facilities Not on the Reserve
The AUC noted that the off-reserve portions of the line were constructed on schedule and that cost variances were reasonably explained. The AUC approved the costs for this portion of the 1043L project.
1043L-Reserve – Facilities on the Reserve
TransAlta’s costs associated with 1043L-Reserve were $21.6 million, including the costs for the Cooperation Agreement with Enoch for the right of way (“ROW”) access.
The Cooperation Agreement included payments of $250,000 for construction access, $700,000 for a traditional land use and area structure plan and a contribution of $150,000 towards the legal costs of Enoch and $50,000 for an annual structure payment study. The Consumers’ Coalition of Alberta (“CCA”) recommended a disallowance of $575,000, or 50 percent, of these costs.
The AUC found that a disallowance of some costs or rebuilding line 1043L-Reserve was warranted. It also found that the payments of $1.15 million set out in the Cooperation Agreement were properly incurred and should be approved. The AUC further found that a disallowance was necessary for the costs incurred by the utilities to negotiate and conclude the Cooperation Agreement.
The AUC’s focus of necessity was not limited to the applicants’ conduct while engaged in construction-related activities on the reserve. The AUC was also concerned with the extent to which the applicants’ consultation-related conduct prior to the initial work stoppage could have affected the overall level of costs incurred on the reserve portion of the Project.
The AUC found that the applicants had failed to establish, on the balance of probabilities, that all their costs of rebuilding transmission line 1043L on the reserve were prudently incurred. The failure of the applicant to establish that all costs related to on-reserve activities sought to be recovered in this proceeding were prudently incurred arose mainly from their failure to properly demonstrate that they had met the consultation requirements set out in Rule 007.
The AUC found that there was little doubt that by the end of June 2010, AML and TransAlta had been made well aware by Enoch of its financial interests and concerns. For a year prior to AML filing its facilities application on July 28 2010, AML and TransAlta engaged in a series of consultations with the representatives of Enoch. As required by Rule 007, these consultations were well recorded. During these consultations, Enoch raised issues mainly focused on economic compensation and related benefits for the community.
Despite the commitments made by AML to Enoch, regarding discussions with the First Nations about the Project and notifying them of construction and maintenance activities, there was no record of any communications during a period of one year and four months, until two months before AML restarted construction.
The AUC found that TransAlta’s explanation of the lack of records of any consultation with Enoch would not transform a failure to act reasonably or prudently in maintaining complete records as required by Rule 007 into something inconsequential. The AUC noted that the explanation would not in any way assist the applicant in meeting their requirement of proving that their conduct was prudent or reasonable and likely to lead to completion of construction of 1043L-Reserve on budget and on time.
The AUC limited its findings on the question of whether and to what extent expenditures on the Project were prudently incurred. The AUC determined that the applicants had failed to establish, on the balance of probabilities, that their conduct related to Project consultations with Enoch between July 2010 and May 2012 had been prudent and reasonable.
As a result, the AUC found that not all costs were reasonably incurred. It found and directed that it would be reasonable to reduce the amount of expenditures eligible for recovery by the applicant by 15 percent. The AUC further found it reasonable for the recoverable amount of legal and related costs incurred by the utilities associated with negotiating and concluding the Cooperation Agreement to be reduced by 15 percent. The AUC left it to the applicants in both cases to determine themselves the appropriate division of the disallowance of funds expended.
TransAlta estimated the costs associated with the only viable re-route, suited to curtail the work stoppage, to be $60 million. The AUC found this amount to have been far more than the actual costs incurred in rebuilding the line through the reserve.
Regarding the CCA’s comments on the costs incurred in relation to the Cooperation Agreement, the AUC found that the negotiations between AML, TransAlta and Enoch were necessary to address historical concerns and assess issues. The AUC considered the costs of the Cooperation Agreement to have been reasonable.