Service Area – Compensation
In this decision, the AUC determined that it is reasonable that EPCOR Distribution and Transmission Inc. (“EPCOR”) pays $783,940 in compensation to Battle River Cooperative REA Ltd. (“Battle River”) in relation to the transfer of electric distribution system assets to EPCOR as directed by the AUC in Decision 25300-D01-2020. The AUC also found it reasonable to compensate Battle River in the amount of $67,179 for the construction of distribution system facilities that were required to maintain electric services to Battle River members located outside of the annexed area that was affected by the annexation and transfer of assets ordered by the AUC.
Background and Procedural Summary
In 2019 EPCOR was provided with the exclusive rights to provide electric distribution service to lands annexed as a result of the City of Edmonton expanding its municipal boundaries. Parts of this area were within the service area of Battle River. In Decision 25300-D01-2020, in response to the annexation of the land, the AUC ordered changes to service area boundaries and the transfer of Battle River distribution system facilities and its members within the annexed areas to EPCOR.
EPCOR and Battle River were not able to reach an agreement regarding compensation. As a result, EPCOR requested a decision from the AUC to determine the compensation to be paid to Battle River and proposed a purchase price of $0.784 million based on replacement cost new less depreciation (“RCN-D”) valuation methodology.
The AUC’s Discretion to Determine a Compensation Methodology
The AUC had to determine if it is limited in determining compensation based on types identified under Section 29(4)(c) of the Hydro and Electric Energy Act (“HEEA”), or if it has the discretion in determining compensation under Section 32(2)(b) of the HEEA.
EPCOR argued that, because there was no agreement between it, as the acquiring public distribution facility owner, and the transferring Rural Electrification Association (“REA”) regarding compensation, Section 29(4)(c)(i) of the HEEA mandates the use of reproduction cost new less depreciation in respect of compensation for transferred assets. EPCOR’s application valued compensation based on replacement cost new less depreciation, not reproduction cost new less depreciation.
Battle River argued that Section 32(2) indicates legislative intent for the AUC to consider compensation issues in the context of the particular facts and matters of that issue. It further argued that interpretation of the HEEA must include the context of REAs under the Rural Utilities Act and the legislature’s intent to provide a unique place for REAs in Alberta.
The AUC determined that Section 32 of the HEEA is more specific than Section 29, as Section 32 only applies if: (i) an REA is subject to a Section 29 order; and (ii) the AUC by order transfers to another person the service area or part of it served by the REA. Accordingly, Section 29 must give way to Section 32 of the HEEA.
The AUC found that it has the authority to determine if and what amount of compensation is payable to Battle River under Section 32(2)(b) of the HEEA in the circumstances and is not bound by a particular methodology regarding valuing the facilities that were ordered transferred.
Compensation Methodology to be Used to Determine the Purchase Price
EPCOR proposed a compensation amount of $0.784 million by applying the RCN-D valuation methodology to the transferred assets.
An independent witness for Battle River argued that a fair market value (“FMV”) calculation resulting in a payment of $1.544 million, representing the foregone revenues related to the transferred assets, would be acceptable. Alternatively, the Battle River witness suggested revising the engineering and contingency rates in EPCOR’s RCN-D calculation schedules and then separately adding compensation amounts referenced under Section 29(4) of the HEEA. This alternative method resulted in a compensation amount of $2.157 million.
The AUC determined that the RCN-D compensation method proposed by EPCOR should apply. The AUC repeated its acknowledgment that RCN-D is not the only method that can be used to determine a purchase price for acquired assets. The AUC found that EPCOR’s approach, which included a comprehensive on-site assessment of Battle River’s assets to be transferred, and the application of EPCOR’s estimating method that has been previously approved by the AUC, to be reasonable for calculating the purchase price of Battle River’s electric distribution system related to the transferred assets in the circumstances. Further, the RCN-D calculation has been used repeatedly in previous cases in the valuation of assets acquired by distribution utilities from REAs and municipalities.
The AUC found that the FMV calculation conducted on behalf of Battle River was similar to a discounted cash flow calculation. It determined that the calculation was overly simplistic and based on figures that do not reflect the economic reality of the assets that are to be acquired.
Calculation of RCN-D
EPCOR calculated an RCN amount of $1.757 million based on asset information, operations and maintenance practices, and inspections and surveys of the facilities. To calculate the cost of replacing the transferred facilities, EPCOR used its bottom-up budgeting approach and estimated the material, labour, equipment, subcontractor and engineering costs premised on its current design, engineering and construction standards. EPCOR used an engineering rate of 8.8 percent and a contingency rate of zero percent to estimate the cost of replacing the transferred facilities. EPCOR noted that the engineering rate is based on historic actual engineering costs for similar types of work activities and supported the contingency rate by confirming that contingency is built into its costs estimates. The AUC found this approach and the engineering and contingency rates to be reasonable.
EPCOR applied its AUC-approved Direct Life Method (“DLM”) to determine the depreciation rates, and accumulated depreciation amounts to calculate the D component of the RCN-D formula in the amount of $0.973 million, which was approved by the AUC.
The AUC found no reasonable basis to apply any adjustments to EPCOR’s proposed RCN-D amount of $783,940.
Compensation for Facilities Alterations Outside of the Annexed Area
Battle River requested that the AUC approve an additional payment from EPCOR of $69,389.25 to compensate it for the construction of distribution system facilities that were required to maintain electric services to Battle River members located outside of the annexed area.
EPCOR accepted the costs claimed by Battle River, except for $2,210.51 that Battle River had incurred in relation to a Battle River member that no longer required electric service. Battle River explained that the service in question required a distribution system alteration to ensure electric services were maintained after the transfer of assets. Because the service was idle, Battle River decided to salvage the facilities rather than making alterations because this was the most cost-effective solution. The AUC found that the timing of the discovery of the idle service should have no bearing on the decision to salvage the service.
Accordingly, the AUC approved an additional payment from EPCOR to Battle River of $67,179.
The AUC ordered EPCOR to pay $783,940 in compensation in respect of the transfer of the electric distribution system assets ordered in Decision 25300-D01-2020 to Battle River. EPCOR was ordered to pay a compensation amount of $67,179 in respect of the electric distribution system facilities constructed by Battle River that were required to maintain electric services to Battle River members located outside of the annexed area that were affected by the annexation and transfer of assets ordered in Decision 25300-D01-2020.