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Transmission Assets – Transfer

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In this decision, the AUC approved, with conditions, the application of AltaLink Management Ltd. (“AltaLink”) requesting approval of the following:

(a) the transfer of specific transmission assets to PiikaniLink Limited Partnership (“PLP”) and KainaiLink Limited Partnership (“KLP”); and

(b) the general tariffs for each of PLP and KLP on an interim basis.

The AUC approved the transfer of the assets to PLP and KLP. Applying the no-harm test, the AUC found that the identified financial harm from the transaction could be mitigated through the imposition of conditions. The AUC approved the PLP and KLP general tariffs on an interim basis, effective the date of completion of the transfers.

Background

AltaLink, in its capacity as general partner of AltaLink L.P. and as general partner of each of PLP and KLP filed transfer applications seeking approval for the transfer and sale of a portion of AltaLink’s transmission assets pertaining to its 240 kV transmission line between the Goose Lake Substation and the North Lethbridge Substation (the “SW Line”). The portions of the SW Line that were proposed to be sold and transferred were the assets located on the Piikani Reserve No. 147 and on the Blood Reserve No. 148. These transmission assets were referred to as the PLP transmission assets and the KLP transmission assets, respectively.

No-Harm Test for Transfer Applications

In fulfilling its public interest mandate when considering applications pursuant to sections 101 and 102 of the Public Utilities Act (“PUA”), the AUC applies a no-harm test.

In this case, the AUC considered the following factors associated with the proposed transfers to assess whether they resulted in financial harm to ratepayers:

• incremental audit fees and hearing costs for PLP and KLP Transmission Facility Owners (“TFOs”);

• financing arrangements to provide funding to acquire the transmission facilities from AltaLink L.P.;

• financial viability of PLP and KLP; and

• income tax considerations.

Financial Impact

The AUC found that:

(a) approval of the asset transfers, as proposed, would result in ongoing incremental costs to ratepayers for audit fees and hearing costs, approximated for 2017 at $120,000 per year ($35,000 for annual audit fees payable to external auditors, and $25,000 associated with hearing costs, for each of PLP and KLP); and

(b) the repayment terms in the loan agreements resulted in financial harm to ratepayers that, on balance, would leave them worse off than they otherwise would be.

The AUC also determined that the offsetting benefits claimed by AltaLink did not mitigate the financial harm.

However, the AUC found that the identified financial harm from the transaction could be mitigated through the imposition of conditions. The AUC approved the proposed transfers subject to the condition that any unreasonable or undue financial risk to ratepayers arising from the repayment terms in the financing of the proposed transfers would not be included within the AltaLink tariff.

Financing Arrangements

The AUC noted that AltaLink L.P. proposed to finance the sale of a portion of its own assets to enable PLP and KLP to purchase the assets being transferred. As such, the AUC considered the following factors in assessing potential harm to ratepayers:

(a) the reasonableness of the proposed interest rates in the loan agreements;

(b) the choice of lender; and

(c) the reasonableness of the repayment terms in the loan agreements.

The AUC found that the proposed interest rates did not result in increased costs to ratepayers. The AUC also accepted the explanation that because any advances under the loan agreements would bear interest at AltaLink L.P.’s approved weighted average cost of debt, which was the same rate that would be used if the assets remained in AltaLink L.P.’s rate base, ratepayers would be kept whole. The AUC found that ratepayers, on balance, would be no worse off than they were prior to the proposed transfers.

The AUC was not persuaded that, for the purposes of the transfer applications, AltaLink L.P. should be financing the purchase and ongoing financial obligations of PLP and KLP under the terms and conditions of repayment currently reflected in the loan agreements.

The AUC found that the repayment terms as set out in the loan agreements resulted in harm to ratepayers that, on balance, would leave ratepayers worse off than they otherwise would be. Although AltaLink considered the risk of PLP and/or KLP failing to repay the principal and interest to be low, it remained a fact that it was ratepayers, not AltaLink L.P., that were exposed to this risk. Consequently, the AUC approved the proposed transfers subject to the following condition:

• any unreasonable or undue financial risk to ratepayers arising from the repayment terms in the financing of the proposed transfers may not be included within the AltaLink tariff.

Financial Viability of PLP and KLP

The AUC found that ratepayers would not be harmed by the untested financial profile of the new TFOs, namely, PLP and KLP. The terms of the limited partnership agreements provided that any failure on the part of PLP or KLP to contribute capital would be funded by AltaLink L.P. and the deemed equity and debt components of the capital structures would remain the same post-transfer.

Income Taxes

The stand-alone principle provides that only the costs, risks, and returns associated with delivery of regulated utility services should be included in revenue requirement. The AUC relied on the stand-alone principle to assess whether the proposed transfers were likely to harm ratepayers. As such, the AUC declined to consider the ultimate locus of ownership of PLP and KLP when applying the no-harm test regarding potential income tax effects.

The AUC found it reasonable to include a tax provision in the revenue requirements of the new entities. More generally, having found taxable corporate structures such as those proposed in the transfer applications to be a reasonable means of facilitating the ownership, management and operation of the transferred assets, the AUC also found that such taxable corporate structures would leave ratepayers no worse off after the proposed asset transfers than they were before, thus satisfying the no-harm test.

Availability of Unclaimed Capital Costs for Capital Cost Allowance Claims

The AUC was satisfied with AltaLink’s explanation that because PLP and KLP decided to roll over their respective unclaimed capital costs for the PLP transmission assets and the KLP transmission assets, there was no risk of harm to ratepayers as a result of a reduction in unclaimed capital costs available for capital cost allowance claims.

The AUC found that the proposed transfers would not result in harm to ratepayers on this basis.

Continuity of Safe and Reliable Service

The AUC found that:

(a) the proposed transfers would not harm ratepayers from the perspective of safety, reliability or the operation of the SW Line post-transfer;

(d) AltaLink demonstrated a track record as a safe and reliable operator of transmission assets since 2001; and

(c) the fact that AltaLink would continue to operate the PLP and KLP transmission assets post-transfer were factors satisfying the AUC that no harm would result to rate.

Control and Governance Matters: Ring-Fencing and Inter-Affiliate Code of Conduct

Ring-fencing measures are designed to isolate the creditworthiness of the operating subsidiary from that of its parent entity. The underlying purpose of ring-fencing measures is to shelter the utility and its customers from any negative ramifications arising from the activities of affiliated entities.

The AUC found no harm in relation to the proposed ring-fencing measures. The AUC accepted AltaLink’s submission that because PLP and KLP would receive debt financing directly from AltaLink L.P., establishing credit ratings for PLP and KLP to raise their own public debt financing under the proposed transfers were not a concern. The AUC was satisfied that the proposed ownership structure would allow PLP and KLP to benefit from the same ring-fencing measures already in place. The AUC was also satisfied with the other measures proposed by AltaLink to ensure the financial viability of PLP and KLP. These included restricting the businesses of PLP and KLP under the limited partnership agreements to regulated transmission on their respective reserves, thereby restricting the risks of PLP and KLP to those associated with regulated transmission assets.

The AUC accepted AltaLink’s submission that any inter-affiliate arrangements for products or services entered into by PLP and KLP would be subject to AltaLink’s Inter-Affiliate Code of Conduct and remain subject to the AUC’s broad regulatory oversight. Therefore, the AUC found that this aspect of the proposed transfers satisfied the no-harm test.

PLP and KLP General Tariff Applications

AltaLink requested the approval of revenue requirement allowances for PLP and KLP in the amounts of $5,218,500 and $3,482,400 for the year 2017 and $5,105,300 and $3,408,200 for the year 2018, respectively.

The AUC accepted AltaLink’s proposed pro-rata mechanism to implement the PLP and KLP tariffs and adjust the revenue requirement in AltaLink’s general tariff application. However, because the 2018 revenue requirements of the PLP and KLP tariffs were approved only on an interim basis, AltaLink, in its capacity as the general partner of AltaLink L.P., was not required to adjust its revenue requirement in the same prorated manner immediately.

Rate Base

The AUC directed that the effective date for the evaluation of the assets be the effective date of the asset transfers to PLP and KLP. Further, the AUC waived the application of the half-year rule in the initial year of operations for PLP and KLP to enable this adjustment. The AUC found that waiving this rule would not harm ratepayers.

Because both PLP and KLP would be new TFOs, neither would have any transaction history to perform their own lead-lag study for determining working capital and revenue requirement. In this circumstance, the AUC found that the methodology and calculations used to support necessary working capital amounts for the PLP and KLP tariffs were reasonable. Accordingly, the amounts of $490,400 and $327,300 may be used as the basis for the necessary working capital allowance within the interim tariffs for PLP and KLP, respectively.

Direct Operation and Maintenance Costs

The AUC approved AltaLink’s forecasts of direct operation and maintenance (“O&M”) costs for PLP and KLP for the years 2017 and 2018 in the amounts of $301,500 and $183,300. The AUC approved these amounts to be used as the basis for revenue requirement allowances for direct O&M costs in the interim tariffs for PLP and KLP, respectively.

The AUC found the direct O&M costs were reasonable because they would be offset on a one-to-one basis by a revenue offset applied to AltaLink L.P.’s tariff.

Payments in Lieu of Property Tax

The AUC approved AltaLink’s forecasts of the cost of payments in lieu of taxes for PLP and KLP for the years 2017 and 2018 as filed. The AUC approved AltaLink using the amounts of $214,900 and $65,900 as the basis for revenue requirement allowances for the cost of payments in lieu of taxes in the interim tariffs for PLP and KLP, respectively.

The AUC was not persuaded that the costs associated with payments in lieu of taxes would grow at the same rate following the transfer of assets to PLP and KLP as they would have if the transfers had not taken place. Accordingly, the AUC determined that additional oversight of payments in lieu of taxes would be required, at least initially, as part of the AUC’s oversight of a proposed deferral account and in respect of future PLP and KLP tariffs.

General and Administrative Expense

The AUC approved the general and administrative expense forecasts of $156,500 for 2017 and $160,900 for 2018 within the interim tariffs for each of PLP and KLP.

All costs incurred by AltaLink for general and administrative expenses would be charged through a fixed fee inter-affiliate charge from AltaLink L.P. to each of PLP and KLP.

The activities within the general and administrative expense charges to PLP and KLP included accounting, treasury, audit, legal and regulatory.

Because all general and administrative expenses included in the PLP and KLP revenue requirements, other than audit costs and hearing costs, would be offset on a one-to-one basis by a revenue offset applied to AltaLink’s tariff, the AUC found these costs were reasonable.

The AUC was satisfied that the method employed to arrive at the forecast for general and administrative expenses in the PLP and KLP tariffs were reasonable.

However, the AUC did not consider that ratepayers should bear any incremental audit costs resulting from the proposed transfers. Accordingly, as audit costs were included within the general and administrative expense forecasts of PLP and KLP, the AUC found that the audit costs of $35,000 should be removed from the U.S. Account 920 forecasts of both PLP and KLP.

Depreciation Expense

The AUC approved AltaLink’s depreciation expense forecasts of $1,482,500 for each of 2017 and 2018 for PLP, and $871,300 for each of 2017 and 2018 for KLP, as filed.

Return on Rate Base

The AUC approved the proposed revenue requirement allowances for return in the amounts of $3,011,800 and $2,910,600 for the years 2017 and 2018, respectively, for PLP, and $2,153,600 and $2,091,800 for the years 2017 and 2018, respectively, for KLP, as filed.

The AUC agreed with AltaLink’s proposal that the same capital structure and rates of return be applied to AltaLink L.P., PLP, and KLP.

Income Tax Expense

The AUC approved the use of a zero income tax expense within the interim PLP and KLP tariff to commence the effective date of the transfers.

The AUC considered the use of the flow-through method for the calculation of income tax expense within the applied-for PLP and KLP tariffs was reasonable for AltaLink’s tariff.

Deferral Account Reserve Accounts

Regarding each of the requested deferral accounts, the AUC:

• approved a self-insurance reserve (“SIR”) account;

• denied a hearing cost reserve account;

• deferred consideration of a deferral account for payments in lieu of property taxes;

• deferred consideration of a deferral account for annual structure payments; and

• approved a direct assign capital deferral account.

The AUC agreed with AltaLink’s rationale that because the commercial insurance costs for transmission assets was prohibitively high, it was reasonable for PLP and KLP to have a SIR account structured on the same basis as the SIR account approved for AltaLink L.P.

Summary

The AUC approved the transfer of the assets to PLP and KLP. Applying the no-harm test, the AUC found that the identified financial harm from the transaction could be mitigated through the imposition of conditions. The AUC approved the PLP and KLP general tariffs on an interim basis, effective the date of completion of the transfers.