Decision Utility Asset Disposition. November 26, 2013

Transcription

1 Decision Utility Asset Disposition November 26, 2013

2 The Alberta Utilities Commission Decision : Utility Asset Disposition Application No Proceeding ID No. 20 November 26, 2013 Published by The Alberta Utilities Commission Fifth Avenue Place, Fourth Floor, 425 First Street S.W. Calgary, Alberta T2P 3L8 Telephone: Fax: Website:

3 Contents 1 Introduction Overview of judicial and Alberta regulatory decisions before and after Stores Block Introduction Regulatory practice in Alberta before TransAlta Regulatory practice in Alberta after TransAlta Stores Block Alberta Court of Appeal decisions subsequent to Stores Block Carbon Harvest Hills Salt Caverns Deferred gas account appeal Additional AUC decisions after Stores Block Decision Carbon Storage Scoping Decision Review and Variance Decision Fortis Special Charge Decision ATCO Gas GRA Decision Generic Cost of Capital Decision Disposition of Salt Cavern Assets Decision ATCO Electric GTA Compliance Filing Consideration of Stores Block in other jurisdictions Bell Canada v. Bell Aliant Regional Communications Toronto Hydro Electric System Ltd. v. Ontario Energy Board FortisBC Inc. v. Shaw Cablesystems Ltd NEB Decision RH TransCanada PipeLines Limited Principles derived from court and AUC decisions Remaining matters to be considered Final revised issues list Issue 1 Asset disposition issues Issue 1.1 Ordinary course dispositions Supplemental process on depreciation principles Issue 1.2 Reinvestment of sales proceeds Issue 2 Used or required to be used issues Issue 2.1 Stranded assets Issue Definition of stranded assets including a threshold dollar size and / or definition of the smallest units of property to potentially be considered stranded Issue Applicability of Stores Block to a determination of responsibility for stranded assets Issue Application of the relevant legislation to a determination of responsibility for stranded assets owned by gas utilities Issue Application of the Electric Utilities Act and other relevant legislation to a determination of responsibility for stranded assets owned by electric utilities AUC Decision (November 26, 2013) i

4 Issue Applicability of stranded asset findings to the 2011 and 2012 test years Issue 2.2 Responsibility for ongoing costs of retired assets Issue 2.3 Ongoing cost responsibility for retired assets subject to settlements Issue 2.4 Verification of operational purpose Commission findings Application of Stores Block Do Stores Block principles also apply to the disposition of assets inside the ordinary course of business? Inclusion of assets in rate base Depreciation Does the depreciation methodology comply with the principles in Stores Block and subsequent cases? Does the Commission have the authority to include, as a part of its depreciation methodology, a provision that charges/refunds to customers on a prospective basis, depreciation rate adjustments resulting from an over or under recovery of depreciation expense in prior years? Stranded assets and post-retirement costs Special facilities tariffs Review and variance applications Decision , 2011 Generic Cost of Capital Decision , ATCO Gas GRA Criteria and conditions for assets disposed of outside the ordinary course of business Reinvestment of sales proceeds Verification of operational purpose Summary Appendix 1 Proceeding participants Appendix 2 Summary of Alberta legislation Alberta Energy and Utilities Board Act, RSA 2000, c A Alberta Utilities Commission Act, SA 2007, c A Electric Utilities Act, SA 2003, c E Transmission Regulation, AR 086/ Gas Utilities Act, RSA 2000, c G Roles, Relationships and Responsibilities Regulation, AR 186/ Public Utilities Act, RSA 2000, c P Appendix 3 Summary of Commission directions ii AUC Decision (November 26, 2013)

5 The Alberta Utilities Commission Calgary, Alberta Decision Application No Utility Asset Disposition Proceeding ID No Introduction 1. The Alberta Utilities Commission (AUC or Commission), by notice dated April 2, 2008, (notice) initiated the Utility Asset Disposition proceeding. The notice referred to the Supreme Court of Canada s decision in ATCO Gas & Pipelines Ltd. v. Alberta (Energy & Utilities Board), 2006 SCC 4, [2006] 1 S.C.R. 140 (Stores Block) and stated: The Stores Block Decision may have various implications with respect to regulation of Alberta utilities. In particular, the guidance provided by the courts may require reconsideration of certain aspects of traditional regulatory approaches to the acquisition and disposition of utility assets and to the setting of just and reasonable rates. Parties have argued various interpretations of the Stores Block Decision in several recent proceedings before the EUB and in various ongoing proceedings before the Commission. The Commission would like to develop a comprehensive understanding of these potential implications through this Proceeding and then to apply that understanding in a consistent manner in future decisions. This single proceeding approach has the advantage of allowing broad stakeholder participation on focused issues thereby avoiding the disadvantages associated with a piecemeal consideration of these issues through a series of specific applications. These disadvantages include: time and cost inefficiencies resulting from multiple and perhaps overlapping proceedings, and any reviews and appeals therefrom; the potential for inconsistent treatment of similar applications; uncertainty with respect to any aspect of the Commission s approach to rate related matters is disruptive to all stakeholders; and the potential that certain stakeholders will be unable to effectively participate on material issues if they are considered in a variety of specific applications. (footnote omitted) 2. The notice set out the three principal objectives of the proceeding, stating that the Commission intended to: provide interested parties an opportunity to advance and defend their interpretation of the Stores Block Decision provide interested parties an opportunity to identify and explore the potential implications of the Stores Block Decision to utility regulation in Alberta develop a consistent, principled approach to applying the guidance provided by the Stores Block Decision, while providing sufficient flexibility to address the specifics of each proceeding AUC Decision (November 26, 2013) 1

6 3. The Commission considered that a single proceeding with broad stakeholder participation from all Commission regulated utilities and their stakeholders to be timely, and in the best interest of regulatory efficiency, procedural fairness and regulatory certainty. 4. Following the filing of initial submissions on the Issues List attached as Appendix A to the notice, ATCO Gas and ATCO Pipelines (divisions of ATCO Gas and Pipelines Ltd.) and ATCO Electric Ltd. (collectively the ATCO Utilities) filed a motion to suspend the proceeding. In Decision , 1 the Commission suspended the Utility Asset Disposition proceeding in light of proceedings before the Alberta Court of Appeal relating to issues before the Supreme Court of Canada in Stores Block. The Commission determined: The Commission acknowledges that additional clarification of the meaning, scope and application of the Stores Block Decision by the courts can provide additional direction for the Commission and will further the Commission s goal of avoiding potentially inconsistent decisions The matters that were before the Alberta Court of Appeal referred to in Decision have been addressed, 3 as discussed below. 6. In Decision , 4 with respect to a review and variance application of Decision , 5 the 2011 Generic Cost of Capital decision, the Commission noted that a stranded assets issue had arisen and directed that the matter be further considered in the Utility Asset Disposition proceeding or in a new generic proceeding. The Commission stated: 39. The review panel notes that the Commission sought to have the issues raised by the Stores Block decision of the Supreme Court of Canada, including the issue of stranded assets, resolved when the Commission initiated the Utility Asset Disposition Rate Review Proceeding (Proceeding ID No. 20) on April 2, Following a number of procedural steps, Proceeding ID No. 20 was suspended on November 20, Given this and the submission of ATCO Utilities, the review panel considers that the issue of stranded assets and who bears the risk in relation to stranded assets should be evaluated in the context of the relevant legislation and case law and therefore expects to either reinitiate Proceeding ID No. 20 or initiate a generic proceeding regarding asset disposition and stranded assets. The Commission will establish this proceeding after the issuance of a Commission decision on the Rate Regulation Initiative (Proceeding ID No. 566). 6 (footnote omitted) Decision : Review of Rate Related Implications of Utility Asset Dispositions Following the Supreme Court s Calgary Stores Block Decision, Reasons for Decision on Motion by the ATCO Utilities dated October 21, 2008, Application No , Proceeding ID No. 20, November 28, Decision , page 14. ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board), [2009] A.J. No. 489, 2009 ABCA 171 (Harvest Hills) and ATCO Gas and Pipelines Ltd. v. Alberta (Utilities Commission), 2009 ABCA 246 (Salt Caverns). Decision : Decision on Request for Review and Variance of AUC Decision , 2011 Generic Cost of Capital, Application Nos , , , , and , Proceeding ID No. 1697, June 4, Decision : 2011 Generic Cost of Capital, Application No , Proceeding ID No. 833, December 8, Decision , paragraph 39, pages 10 to AUC Decision (November 26, 2013)

7 7. In Decision , 7 with respect to a review and variance application of Decision , 8 the ATCO Gas General Rate Application Phase I decision, the Commission noted that an issue with respect to production abandonment costs had arisen and directed that the matter be further considered in the Utility Asset Disposition proceeding or in a new generic proceeding. The Commission stated: 110. With respect to the submissions of AG and interveners regarding the correct interpretation of the legislation and case law regarding production abandonment, the review panel notes that in Decision , the Commission stated that it would either re-initiate the Utility Asset Disposition Rate Review Proceeding (Proceeding ID No. 20) or establish a generic proceeding to address asset disposition and stranded assets after the issuance of a Commission decision on the Rate Regulation Initiative (Proceeding ID No. 566). For the purposes of regulatory efficiency, the review panel considers that the discussion regarding production abandonment and the Stores Block line of cases should form part of either Proceeding ID No. 20 or the generic proceeding. To the extent that the issue of previous settlement agreements impacts AG s production abandonment costs, this issue can be addressed either in Proceeding ID No. 20 or the generic proceeding. In the interim, the Commission directs AG to maintain a placeholder of zero with respect to these costs, to be adjusted upon completion of either Proceeding ID No. 20 or the generic proceeding. 9 (footnote omitted) 8. In a letter dated June 28, 2012, 10 addressed to each of AltaGas Utilities Inc. (AltaGas), AltaLink Management Ltd. (AltaLink), ATCO Utilities, ENMAX Power Corporation (ENMAX), EPCOR Distribution & Transmission Inc. (EPCOR) and FortisAlberta Inc. (Fortis) (collectively the Alberta Utilities), the Commission confirmed that the issue of risk with respect to stranded assets, including whether or not the findings of the Commission would apply to the 2011 and 2012 test years, would be referred to the Utility Asset Disposition proceeding or to a generic proceeding. The Commission stated: In Decision , the Commission found that the issue of stranded assets and who bears the risk in relation to stranded assets should be evaluated in the context of the relevant legislation and case law and therefore expects to either re-initiate Proceeding ID No. 20 or initiate a generic proceeding regarding asset disposition and stranded assets. The Commission has reviewed the Utilities letter and considers that the issues raised by the Utilities will be determined as part of either Proceeding ID No. 20 or another generic proceeding. In that proceeding, the Commission will consider whether its findings should apply to 2011 and 2012 or prospectively. Following completion of either Proceeding ID No. 20 or another generic proceeding, and if the matter has not already been addressed, the Commission will establish a proceeding to determine whether any adjustments to the fair return of the Utilities should be made for 2011 and (footnote omitted) Decision : ATCO Gas (a Division of ATCO Gas and Pipelines Ltd.), Decision on Request for Review and Variance of AUC Decision , Application No , Proceeding ID No.1698, June 08, Decision : ATCO Gas (a Division of ATCO Gas and Pipelines Ltd.), General Rate Application Phase I, Application No , Proceeding ID No. 969, December 5, Decision , paragraph 110, page 27. Exhibit 24.01, Proceeding ID No. 1697: Applications to review and vary Decision : 2011 Generic Cost of Capital. Commission letter dated June 28, 2012, paragraphs 8 and 9. AUC Decision (November 26, 2013) 3

8 9. In Decision , 12 the distribution performance-based regulation (PBR) decision, the Commission noted that it will shortly issue bulletins to commence a proceeding on the generic cost of capital and to either continue Proceeding ID No. 20 with respect to Utility Asset Dispositions or initiate a generic proceeding regarding asset disposition and stranded assets In a letter dated October 17, 2012, the Commission recommenced the Utility Asset Disposition proceeding to address Stores Block related matters. As part of the written process schedule that was established, the Commission provided an opportunity for parties not previously registered in the proceeding to file a statement of intention to participate (SIP) by October 31, Similarly, any existing party to the proceeding that no longer intended to participate was required to advise the Commission by October 31, The Commission provided an updated issues list and requested comments from interested parties regarding potential revisions to the issues list. Following review of the comments received, the Commission issued a final revised issues list on December 7, In Decision , 14 after noting that similar matters were raised in Decision , the Commission determined that consideration of the costs associated with two former AltaGas production well sites should be referred to the Utility Asset Disposition proceeding. 12. The following table summarizes the process steps followed subsequent to recommencement of the proceeding on October 17, 2012: Process step Deadline date Statement of intent to participate November 30, 2012 Submissions on draft revised issues list November 30, 2012 Final issues list issued by the Commission December 7, 2012 Written submissions from all parties January 16, 2013 Information requests to all parties February 1, 2013 Information request responses from all parties February 22, 2013 Rebuttal evidence from all parties March 15, 2013 Argument from all parties May 3, 2013 Reply argument from all parties June 3, 2013 Commission supplemental information requests to parties June 25, 2013 Supplemental information responses from parties July 31, 2013 Supplemental argument from parties August 23, 2013 Supplemental reply argument from parties August 28, During the course of the proceeding, evidence was received from the Alberta Utilities, the Office of the Utilities Consumer Advocate (UCA), The City of Calgary (Calgary), and TransAlta Corporation. 14. The Commission considers that the record for the proceeding closed on August 28, Decision : Rate Regulation Initiative, Distribution Performance-Based Regulation, Application No , Proceeding ID No. 566, September 12, Decision , paragraph 1002, page Decision (Errata): AltaGas Utilities Inc., General Rate Application Phase I Compliance Filing Pursuant to Decision , Application No , Proceeding ID No. 1921, December 5, AUC Decision (November 26, 2013)

9 15. In reaching the determinations set out within this decision, the Commission has considered all relevant materials comprising the record of this proceeding, including the evidence, argument and reply argument and supplements thereto, provided by each party. Accordingly, references in this decision to specific parts of the record are intended to assist the reader in understanding the Commission s reasoning relating to a particular matter and should not be taken as an indication that the Commission did not consider all relevant portions of the record with respect to that matter. 16. This decision will first provide an overview of judicial and Alberta regulatory decisions before and after Stores Block, then it will review the comments received from parties on the final revised issues list, followed by the findings of the Commission. 2 Overview of judicial and Alberta regulatory decisions before and after Stores Block 2.1 Introduction 17. This section reviews the development of the regulatory and case law, primarily Alberta based, related to the sale or removal of assets from utility rate base before and after the Supreme Court of Canada s decision in Stores Block. Specifically, this overview will review decisions related to: (i) the requirement of Section 26(2) of the Gas Utilities Act, RSA 2000, c. G-5 and Section 101(2) of the Public Utilities Act, RSA 2000, c. P for prior regulatory approval of a disposition of an asset by a designated utility outside of the ordinary course of business (ii) the removal from utility rate base and customer rates of assets that are no longer used or required to be used to provide service to the public within Alberta as that term is used in Section 37(1) of the Gas Utilities Act and Section 90(1) of the Public Utilities Act 18. This review is intended to provide a context for the discussion of the matters before the Commission in this proceeding. It is anticipated that this decision will assist parties in future related proceedings by providing clarity on the Commission s treatment of these matters leading to increased regulatory efficiency. This anticipated benefit was noted by the Commission in its correspondence of October 17, 2012, recommencing this proceeding when it stated: 2.2 the Commission expects the interpretations and principles established by this proceeding to be applied in relevant future applications, subject always to the ability of parties to argue that they should not be applied in the particular circumstances of a specific application. 16 Regulatory practice in Alberta before TransAlta 19. Section 26(2)(d) of Gas Utilities Act and Section 101(2)(d) of the Public Utilities Act require a utility designated under Section 26(1) or 101(1) respectively, to obtain Commission approval before it may sell, lease, mortgage or otherwise dispose of or encumber its property, franchises, privileges or rights, or any part of it or them, outside the ordinary course of the See Appendix 2, Summary of Alberta legislation. Exhibit 54.01, paragraph 13. AUC Decision (November 26, 2013) 5

10 owner s business. The legislation provides that a sale or other disposition concluded without such approval is void. 20. Upon application of a utility for approval of an asset disposition, the Commission s predecessors 17 have applied a no harm test to determine if ratepayers could be negatively impacted by a proposed transaction. 18 This no harm test was also used by the regulator to assess applications relating to the sale of a utility s business and with respect to the merger of utilities. Harm can result either through higher rates or by degradation of service. If a proposed transaction resulted in a material harm to customers that could not otherwise be mitigated, the regulator would deny the application. 21. Prior to the Alberta Court of Appeal s decision in TransAlta Utilities Corporation v. Alberta (Public Utilities Board), (1986) 68 A.R. 171 (TransAlta) the Alberta regulator generally allocated the entire gain or loss arising on an approved sale of a specific utility asset to the customers of the utility. In Order E the Public Utilities Board (PUB) explained the regulatory practice followed before TransAlta whereby customers benefited from gains on sale and also absorbed losses when it considered the sale of a water franchise by TransAlta Utilities Corporation (TransAlta Corp.) to the County of Strathcona No. 20. The PUB stated: In Alberta, under the provisions of the Public Utilities Board Act, all utility assets that are used or required to be used to provide service to utility customers are permitted to be included in the rate base of the utility at the original cost of those assets (assuming the original cost is prudent). In fixing and approving customer rates, the Board is required to fix a fair return on the rate base. The fair return forms part of the revenue requirement of the utility. The Board also fixes the depreciation rate to be applied to the assets which form the rate base and the resulting depreciation expense also forms part of the revenue requirement of the utility. The revenue requirement is funded through customer rates which are approved as just and reasonable by the Board. Through this process or mechanism, the Board is required to be satisfied that the owner of the utility is given the opportunity to earn a return of his investment in the utility assets and a fair return on his investment in those assets. At the same time the Board is required to be satisfied that the customers are paying just and reasonable rates for the utility service they receive. The Board generally takes into account, inter alia, any relevant evidence with respect to inflation or deflation in the test year or test years in fixing the fair return on rate base. Therefore, as a general rule, the Board considers that any profit or loss (being the difference between the net book value of the assets and the sale price of those assets) Public Utilities Board and the Alberta Energy and Utilities Board. The Alberta Energy and Utilities Board summarized the general principles of the no-harm test in several decisions, including: Decision : TransAlta Utilities Corporation, Sale of Distribution Business, Application No , July 5, 2000, and in Decision , ATCO Gas North (A Division of ATCO Gas and Pipelines Ltd.), Sale of Certain Petroleum and Natural Gas Rights, Production and Gathering Assets, Storage Assets and Inventory: Reasons for Decision , Application Nos , , & , July 31, Order No. E84115: TransAlta Utilities Corporation, IN THE MATTER OF an Application by TransAlta Utilities Corporation to the PUB for an Order or Orders approving the sale to the County of Strathcona No. 20 of all the property, franchises, privileges or rights used to supply water to customers within Sherwood Park, Alberta, File No. E (1) (g)-4, October 12, AUC Decision (November 26, 2013)

11 resulting from the disposal of utility assets should accrue to the benefit of the customers of the utility and not to the shareholders of the utility Despite this general rule, however, the PUB approved the request of TransAlta Corp. to retain the loss on sale for the shareholders because it was exiting the water utility business and it was unfair to pass on the loss to electricity customers when the water assets did not form part of the electric utility rate base. 23. The PUB commented further on the state of affairs prior to TransAlta in Decision E84113, 21 a proceeding which dealt with the sale of land and a building by Canadian Western Natural Gas Company Limited to the Town of Okotoks. Both the land and the building were sold for a gain over net book value. In awarding the gain on sale to customers, the PUB stated: Therefore, as a general rule, the Board considers that any profit of loss (being the difference between the net book value of the assets and the sale price of those assets) resulting from the disposal of utility assets should accrue to the benefit of the customers of the utility and not to the shareholders of the utility. Depending upon the circumstances of each case (including the matter of prudency of management of the utility in the acquisition and disposal of utility assets), the Board considers that no exception to the general rule should be made whether or not the transaction is in the ordinary course of business of the utility. This is not to say that the question of in the ordinary course of business is irrelevant when considering the Board s approval under section 91(1)(h) of the Public Utilities Board Act. Furthermore, the Board considers that, depending upon the circumstances of each case, no exception to the general rule should be made whether the transaction involves depreciable or non-depreciable utility assets The position reflected in the above cases was summarized by the Alberta Energy and Utilities Board (EUB) in Decision where it stated:...the treatment of any gain or loss on sale of utility assets would depend on the merits of a particular case. It was noted, however, that prior to the decision of the Alberta Court of Appeal in TransAlta Utilities Corporation v. Alberta (Public Utilities Board), the Board had adopted a general rule that any difference between the NBV of utility assets included in rate base and the sale proceeds of those assets should accrue to customers, whether the difference was positive or negative. 24 (footnote omitted) PUB Order E84115, pages 12 to 16. Decision No. E84113: Canadian Western Natural Gas Company Limited, In the matter of an Application by Canadian Western Natural Gas Company Limited respecting the sale of certain property, File No. E4.7.24(2)(g)-4, October 12, Decision No. E84116: TransAlta Utilities Corporation and City of Edmonton, In the matter of an Application by TransAlta for an Order or Orders of the PUB approving the disposition of a part of its property, franchises, privileges or rights to the City of Edmonton, File No. E3.6.87(1)(g)-5, October 12, 1984, pages Decision : ATCO Gas North, a Division of ATCO Gas and Pipelines Ltd., Sale of Certain Petroleum and Natural Gas Rights, Production and Gathering Assets, Storage Assets and Inventory: Reasons for Decision , Application Nos , , & , File Nos , , & , July 31, Decision , page 11. AUC Decision (November 26, 2013) 7

12 25. TransAlta modified and clarified the regulatory practice in Alberta with respect to the allocation of a gain or loss arising upon sale of a utility asset outside of the ordinary course of business. The case involved a partial loss of franchise and service area by TransAlta Corp. upon the enlargement of the boundaries of the City of Edmonton through annexation. The compensation paid to TransAlta Corp. was based on the reproduction cost new; less depreciation methodology stated in the Hydro and Electric Energy Act, RSA 2000, c. H-16. In Decision E84116 the PUB directed that the gain over net book value realized by TransAlta Corp. in the disposition to Edmonton of the utility assets within the annexed service area should accrue to the benefit of customers. The Court of Appeal disagreed in part, concluding: The decisive point is that present value of plant was chosen for calculation of fair compensation under the Hydro and Electric Energy Act for partial loss of franchise...the Board, when it is calculating revenue, must respect that legislative object. The Board order here nullifies the effect of the Hydro and Electric Energy Act The court approved the PUB allocation from the purchase price of an amount equal to the net book value to shareholders. The court also approved an allocation to customers of an amount based on the depreciation paid to date by customers directing that the present value of the depreciation allowance should be accounted for as revenue, 26 thereby decreasing rates. The court made this determination because: [T]o the extent, then, that allowance for depreciation has been made, the original investment has already been returned to the investors. 27 The balance of the proceeds, however, were allocated by the court to the utility and its shareholders, stating: [s]ubject to the depreciation allowance, the proceeds must be deemed to be the present value of this portion of the rate base, and should not be assigned to revenue. 28 Amounts, other than the net book value, were to be adjusted for inflation because of the reproduction cost new; less depreciation methodology used in calculating the price paid by Edmonton to TransAlta Corp. 2.3 Regulatory practice in Alberta after TransAlta 27. The EUB s interpretation and application of TransAlta was explained in Decision which incorporated the findings of the EUB in Decision The EUB stated in Decision : In the TransAlta Appeal, the Court of Appeal held that the Board had erred in that case in allocating all of the gain on disposition of assets to customers. The Court agreed, in principle, that shareholders were entitled to a return of the NBV and customers were entitled to a return of depreciation expense paid through their rates. However, the Court held that compensation should be in terms of current dollars, with current dollars being measured by the ratio of the actual sale price to original cost of the assets. In Decision , the Board summarized its interpretation and subsequent application of the TransAlta Appeal as follows: In subsequent decisions, the Board has interpreted the Court of Appeal s conclusion to mean that where the sale price exceeds the original cost of TransAlta, page 10. TransAlta, page 11. TransAlta, page 11. TransAlta, page 10. Decision : ESBI Alberta Ltd., 2001 General Tariff Application, Part J: Refiling of Revenue Requirement and Tariff Calculations for DTA Rates, Application No , File No , May 17, AUC Decision (November 26, 2013)

13 the assets, shareholders are entitled to net book value (in historical dollars), customers are entitled to the difference between net book value and original cost, and any appreciation in the value of the assets (i.e. the difference between original cost and the sale price) is to be shared by shareholders and customers. The amount to be shared by each is determined by multiplying the ratio of sale price/original cost to the net book value (for shareholders) and the difference between original cost and net book value (for customers). However, where the sale price does not exceed original cost, customers are entitled to all of the gain on sale. This approach to the allocation of sale proceeds has been referred to by several parties to the current proceedings, including AGN, as the TransAlta Formula. The Board will use this phrase for ease of reference. In Decision , the Board summarized what it considers to be the general rule with respect to allocation of gains or losses on sales of utility assets: The Board accepts that where particular rate base assets are being sold so that they are no longer part of the regulated rate base, the disposition of the gain on sale should, as a general rule, be treated according to the principle set out by the Court of Appeal in the TransAlta Appeal and subsequently applied by the Board. For the purpose of this Decision, the Board confirms this general rule but notes once again that it will be subject to the particular circumstances of the case. (footnotes omitted) 28. When considering applications to dispose of utility assets outside of the ordinary course of business the EUB applied the TransAlta Formula only if there was a gain on sale and only after a consideration of the no harm test. The EUB first considered if there was harm to ratepayers and if there was, a gain on sale could be applied to mitigate the harm. The gain on sale would again be considered in the context of an allocation between shareholders and customers in accordance with the TransAlta Formula. The EUB explained this analysis as follows:...the Board is of the view that the no-harm amounts calculated for each Application are threshold amounts. In other words, they represent the minimum amount that must be paid to customers to save them harmless from the impacts of the proposed sales. However, in some circumstances, the Board is of the view that customers may be entitled to more than the no-harm amount. For the reasons given in Section 4.2 of this Decision, the Board considers that it has the jurisdiction to do so. In the Board s view, if the TransAlta Formula yields a result greater than the no-harm amount, customers are entitled to the greater amount. If the TransAlta Formula yields a result less than the no-harm amount, customers are entitled to the no-harm amount. In the Board s view, this approach is consistent with its historical application of the TransAlta Formula. As explained in Decision , according to the Board s application of the TransAlta Formula: AUC Decision (November 26, 2013) 9

14 shareholders are entitled to a return of NBV; customers are entitled to a return of excess depreciation (i.e. the difference between NBV and original cost); and any excess of sale proceeds over original cost should be shared according to the ratio prescribed by the Court of Appeal in the TransAlta Appeal. It should be noted that it is only when sale proceeds are greater than original cost that a current dollar sharing of proceeds is necessary pursuant to the TransAlta Formula As a result of the EUB s application of the no harm test and the TransAlta Formula, if the EUB determined that customers would be harmed by the proposed transaction, but that the harm could be mitigated by application of a gain on sale of the asset, the EUB would consider approving the transaction and applying all or a portion of the realized gain on sale as a credit to rates by way of mitigation of the harm. The EUB would also apply the TransAlta Formula to the gain and customers would receive a credit for the larger of the no harm amount and the amount allocated under the TransAlta Formula. The EUB summarizes its jurisdiction to apply the proceeds of disposition in this manner in the following extract from Decision : The Board considers that its power to mitigate or offset potential harm to customers by allocating part or all of the sale proceeds to them, flows from its very broad mandate to protect consumers in the public interest. This mandate has been recognized by the Alberta Court of Appeal 25 and the Supreme Court of Canada. 26 It has also been referred to recently on a number of occasions by the Board. 27 In keeping with this broad mandate, section 10(3)(d) of the Alberta Energy and Utilities Board Act 28 authorizes the Board to attach conditions to any order that the Board considers to be in the public interest. In the Board s view, conditions allocating sale proceeds to customers in order to mitigate harm caused by proposed asset dispositions are fully within its jurisdiction as characterized by the courts and reflected in the Board s governing legislation Dome Petroleum Ltd. v. Alberta (Public Utilities Board) (1976) 2 A.R. 453, affd. [1977] 2 S.C.R ATCO Ltd. v. Calgary Power Ltd. [1982] 2 S.C.R. 557, at 576 (per Estey J.). 27 For example, Decision , [32] p 7; and Decision , [33] ESBI Alberta Ltd., 2001General Tariff Application, Phase I & II, Part A: System Support Services Thermal Power Purchase Arrangements (Appendix E) (July 11, 2000), p S.A. 1994, c. A-19.5, as amended. 30. In cases where an approved disposition outside of the ordinary course resulted in sale proceeds less than the original cost, a sharing under the TransAlta Formula was not required. In these cases the previous rule still generally applied with the utility receiving proceeds in an 30 Decision , pages 41 to Decision , page Decision : TransAlta Utilities Corporation, Sale of Distribution Business, Application No , File No , July 5, Decision : ESBI Alberta Ltd., 2001 General Tariff Application Phase I & II Part A: System Support Services Thermal Power Purchase Arrangements (Appendix E), Application No , File No , July 11, AUC Decision (November 26, 2013)

15 amount equal to the net book value and the balance going to customers. 34 In the event that proceeds were less than net book value, creating a loss, customers continued to bear the loss In Decision , 36 the EUB dealt with the allocation of net proceeds, including a net gain, arising from the sale by ATCO Gas of its Calgary Stores building and property, collectively referred to as the Stores Block. The EUB found that ATCO Gas had satisfied the no harm test in an earlier decision 37 and the sale transaction was allowed to proceed. Decision confirmed the no harm finding and allocated the proceeds of sale, including the $5.4 million net gain (equal to the difference between the purchase price less the original cost) between the utility and customers. ATCO Gas was allocated from the net sale proceeds an amount equal to the net book value and customers were allocated an amount equal to the accumulated depreciation. The gain on sale, was allocated between utility shareholders and customers in accordance with the TransAlta Formula. As a result, the $5.4 million net gain on sale was allocated $1.8 million to utility shareholders and $3.6 million to customers. 32. Decision was appealed to the Alberta Court of Appeal 38 which overturned the EUB s decision in part. The court indicated that [c]onsumers of utilities pay for a service, but by such payment, do not receive a proprietary right in the assets of the utility company. 39 The court directed that the proceeds of sale, less an amount equal to accumulated depreciation, be credited to the utility. A portion of the sale proceeds equal to accumulated depreciation remained credited to customers. Leave to Appeal was subsequently granted by the Supreme Court of Canada. As noted above, the Supreme Court of Canada s decision is reported as ATCO Gas and Pipelines Ltd. V. Alberta (Energy and Utilities Board) [2006] 1 S.C.R. 140, [2006] S.C.J. No.4, 2006 SCC 4 and is referred to as Stores Block in this decision. 2.4 Stores Block 33. In Stores Block the Supreme Court of Canada determined that the EUB did not have the jurisdiction to allocate to ratepayers any portion of the sale proceeds arising from the sale of an asset outside the ordinary course of business of a designated gas utility. In making this determination, the Supreme Court of Canada overturned the portion of the Alberta Court of Appeal s decision which allocated to ratepayers a portion of the sale proceeds equal to the accumulated depreciation on the depreciable assets sold by the utility. The court also found that See for example PUB Order E93023, dated March 17, 1993, where the PUB approved a disposition of certain properties owned by Northwestern Utilities Limited where proceeds did not exceed original cost. The utility was entitled to recover the remaining net book value and customers were allocated the balance of the proceeds. See for example: EUB Order U , Application No , dated June 15, 2001, which approved the sale of the Operations Centre of NOVA Gas Transmission Ltd. for less than book value in connection with the merger of NOVA Gas Transmission Ltd. and TransCanada Pipelines Limited. EUB Order U , Application No dated August 3, 2001, in connection with the sale of the Athabasca Maintenance Facility of NOVA Gas Transmission Ltd. for less than book value. EUB Decision , UtiliCorp Networks Canada (Alberta) Ltd., Disposition of the High River Facility, Application No , dated December 11, 2001, which approved the disposition of UtiliCorp s High River facility for an amount less than book value. Decision : ATCO Gas and Pipelines Ltd., Disposition of Calgary Stores Block and Distribution of Net Proceeds Part 2, Application No , File No , March 21, Decision : ATCO Gas and Pipelines Ltd., Disposition of Calgary Stores Block and Distribution of Net Proceeds Part 1, Application No , October 24, ATCO Gas & Pipelines Ltd. v. Alberta (Energy & Utilities Board), 2004 ABCA 3. ATCO Gas & Pipelines Ltd. v. Alberta (Energy & Utilities Board), 2004 ABCA 3, paragraph 64. AUC Decision (November 26, 2013) 11

16 the ability to allocate sale proceeds could not be implied from the statutory regime as necessarily incidental to the explicit powers granted the EUB The Supreme Court of Canada observed that [a]dministrative tribunals or agencies are statutory creations: they cannot exceed the powers that were granted to them by their enabling statute. 41 Further, while [d]iscretion is central to the regulatory agency policy process, in exercising this discretion, statutory bodies must respect the confines of their jurisdiction: they cannot trespass in areas where the legislature has not assigned them authority The court directed that all net proceeds of sale arising from the sale of ATCO Gas s Stores Block building and property be allocated to the utility. In making this determination the court emphasised that the EUB s statutory powers are grounded in its rate making function. The court stated: The interpretation of the Alberta Energy and Utilities Board Act, R.S.A. 2000, c. A-17 ("AEUBA"), the Public Utilities Board Act, R.S.A. 2000, c. P-45 ("PUBA"), and the Gas Utilities Act, R.S.A. 2000, c. G-5 ("GUA") (see Appendix for the relevant provisions of these three statutes), can lead to only one conclusion: the Board does not have the prerogative to decide on the distribution of the net gain from the sale of assets of a utility. The Board's seemingly broad powers to make any order and to impose any additional conditions that are necessary in the public interest has to be interpreted within the entire context of the statutes which are meant to balance the need to protect consumers as well as the property rights retained by owners, as recognized in a free market economy. The limits of the powers of the Board are grounded in its main function of fixing just and reasonable rates ("rate setting") and in protecting the integrity and dependability of the supply system The Supreme Court of Canada acknowledged the no harm test employed by the EUB when considering applications under Section 26(2) of the Gas Utilities Act and commented that the EUB was able to carry out its statutory responsibilities without allocating the proceeds of disposition to customers. The court stated: In fact, it is not necessary for the Board in carrying out its mandate to order the utility to surrender the bulk of the proceeds from a sale of its property in order for that utility to obtain approval for a sale. The Board has other options within its jurisdiction which do not involve the appropriation of the sale proceeds, the most obvious one being to refuse to approve a sale that will, in the Board's view, affect the quality and/or quantity of the service offered by the utility or create additional operating costs for the future The court clearly stated that the property employed by the utility in providing utility service to customers belongs solely to the utility and its shareholders. The regulatory compact does not transfer a property right to customers. In making this point the court commented as follows: These goals have resulted in an economic and social arrangement dubbed the "regulatory compact", which ensures that all customers have access to the utility at a fair price Stores Block, paragraphs 39, 52, 75, and 77. Stores Block, paragraph 35. Stores Block, paragraph 2. Stores Block, paragraph 7. Stores Block, paragraph 77. Also see paragraph 13 with respect to no harm test. 12 AUC Decision (November 26, 2013)

17 nothing more. As I will further explain, it does not transfer onto the customers any property right. Under the regulatory compact, the regulated utilities are given exclusive rights to sell their services within a specific area at rates that will provide companies the opportunity to earn a fair return for their investors. In return for this right of exclusivity, utilities assume a duty to adequately and reliably serve all customers in their determined territories, and are required to have their rates and certain operations regulated The object of the statutes is to protect both the customer and the investor (Milner, at p. 101). The arrangement does not, however, cancel the private nature of the utility. In essence, the Board is responsible for maintaining a tariff that enhances the economic benefits to consumers and investors of the utility Thus, can it be said, as alleged by the City, that the customers have a property interest in the utility? Absolutely not: that cannot be so, as it would mean that fundamental principles of corporate law would be distorted. Through the rates, the customers pay an amount for the regulated service that equals the cost of the service and the necessary resources. They do not by their payment implicitly purchase the asset from the utility's investors. The payment does not incorporate acquiring ownership or control of the utility's assets. The ratepayer covers the cost of using the service, not the holding cost of the assets themselves Further, it is the utility and its shareholders that benefit from gains on the sale of utility property and who must bear any loss arising from such sale. On this point the court stated: The fact that the utility is given the opportunity to make a profit on its services and a fair return on its investment in its assets should not and cannot stop the utility from benefiting from the profits which follow the sale of assets. Neither is the utility protected from losses incurred from the sale of assets....ownership of the assets is clearly that of the utility; ownership of the asset and entitlement to profits or losses upon its realization are one and the same Despite the consideration of utility assets in the rate-setting process, shareholders are the ones solely affected when the actual profits or losses of such a sale are realized; the utility absorbs losses and gains, increases and decreases in the value of assets, based on economic conditions and occasional unexpected technical difficulties, but continues to provide certainty in service both with regard to price and quality The capital invested is not provided by the public purse or by the customers; it is injected into the business by private parties who expect as large a return on the capital invested in the enterprise as they would receive if they were investing in other securities possessing equal features of attractiveness, stability and certainty (see Northwestern 1929, at p. 192). This prospect will necessarily include any gain or loss that is made if the company divests itself of some of its assets, i.e., land, buildings, etc Stores Block, paragraph 63. Stores Block, paragraph 64. Stores Block, paragraph 68. Stores Block, paragraph 67. Stores Block, paragraph 69. Stores Block, paragraph 70. AUC Decision (November 26, 2013) 13

18 39. With respect to who bears the residual risk faced by a utility the court stated: Ratepayers have made no investment. Shareholders have and they assume all risks as the residual claimants to the utility's profit. Customers have only "the risk of a price change resulting from any (authorized) change in the cost of service. This change is determined only periodically in a tariff review by the regulator" (MacAvoy and Sidak, at p. 245) The Supreme Court of Canada also stated that an attachment of sale proceeds could not be characterized as a refund of excessive rates paid by customers over time. Paragraph 71 of the Stores Block decision provides: From my discussion above regarding the property interest, the Board was in no position to proceed with an implicit refund by allocating to ratepayers the profits from the asset sale because it considered ratepayers had paid excessive rates for services in the past. As such, the City's first argument must fail. The Board was seeking to rectify what it perceived as a historic over-compensation to the utility by ratepayers. There is no power granted in the various statutes for the Board to execute such a refund in respect of an erroneous perception of past over-compensation. It is well established throughout the various provinces that utilities boards do not have the authority to retroactively change rates (Northwestern 1979, at p. 691; Re Coseka Resources Ltd. and Saratoga Processing Co. (1981), 126 D.L.R. (3d) 705 (Alta. C.A.), at p. 715, leave to appeal refused, [1981] 2 S.C.R. vii; Re Dow Chemical Canada Inc. (C.A.), at pp ). But more importantly, it cannot even be said that there was over-compensation: the rate-setting process is a speculative procedure in which both the ratepayers and the shareholders jointly carry their share of the risk related to the business of the utility (see MacAvoy and Sidak, at pp ) Although the court indicated that the EUB did not have the jurisdiction to allocate to customers the gain on sale of a utility asset, it did indicate that the EUB could, in certain circumstances, attach conditions to granting an approval for selling an asset. The court stated: This is not to say that the Board can never attach a condition to the approval of sale. For example, the Board could approve the sale of the assets on the condition that the utility company gives undertakings regarding the replacement of the assets and their profitability. It could also require as a condition that the utility reinvest part of the sale proceeds back into the company in order to maintain a modern operating system that achieves the optimal growth of the system In addition, the court indicated that the EUB could in a rate setting context, consider the impact of an approved sale transaction. In this regard, the court stated that the EUB could have convened a hearing of the interested parties in order to modify and fix just and reasonable rates to give due consideration to any new economic data anticipated as a result of the sale With respect to assets that are sold within the ordinary course of business, the court pointed out that Section 26(2) does not apply. 55 The court also considered that Section 26(2) had limited application to assets that were non-utility in character stating: Stores Block, paragraph 68. Stores Block, paragraph 71. Stores Block, paragraph 77. Stores Block, paragraph 81. Stores Block, paragraph AUC Decision (November 26, 2013)

19 2.5 In fact, s. 26(2) can only have limited, if any, application to non-utility assets not related to utility function (especially when the sale has passed the "no-harm" test). The provision can only be meant to ensure that the asset in question is indeed non-utility, so that its loss does not impair the utility function or quality. 56 Alberta Court of Appeal decisions subsequent to Stores Block 44. Following Stores Block the EUB and/or the Commission, and subsequently the Alberta Court of Appeal, considered a number of cases that referenced Stores Block. These decisions are reviewed briefly below Carbon 45. ATCO Gas owned and included in utility rate base for many years a natural gas production field which it subsequently converted primarily into a natural gas storage facility (Carbon Storage). Carbon Storage was used for various utility purposes over the years including natural gas supply, managing peak utility supply requirements, system load balancing, emergency use and revenue generation through the lease of excess storage capacity to third parties. Following deregulation of natural gas prices and the sale of ATCO Gas s retail function to Direct Energy Regulated Services, all uses for the Carbon Storage facility other than revenue generation were discontinued. As a result of these developments, ATCO Gas took the position that Carbon Storage was no longer used or required to be used to provide service to the public, and was therefore not properly part of its rate base under Section 37 of the Gas Utilities Act. 46. In Decision the EUB determined, that given the unique historical circumstances of Carbon Storage, the asset continued to be used or required to be used to provide a service to the public, namely revenue generation, and should be retained in rate base The Alberta Court of Appeal overturned the EUB s decision in ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board) 2008 ABCA 200, leave to appeal to Supreme Court of Canada refused, (December 4, 2008) (Carbon). The court found that the EUB had erred in law or jurisdiction when it included Carbon Storage in rate base as an asset used or required to be used to provide service to the public within Alberta when the only remaining function for those facilities was to generate revenue. The court stated: Section 37 of the Act is primarily forward looking. The Board s jurisdiction is to set rates afterwards, that is for the future: Northwestern Utilities v. City of Edmonton, [1979] 1 S.C.R. 684 at pg The words used or required to be used are intended to identify assets that are presently used, are reasonably used, and are likely be used in the future to provide services. Specifically, the past or historical use of assets will not permit their inclusion in the rate base unless they continue to be used in the system. The fact that the Carbon storage facility was previously used to provide service may provide some context, but it is largely irrelevant to whether that asset should remain in the rate base The court determined that the only reasonable reading of s. 37 is that the assets that are used or required to be used to provide service are only those used in an operational sense. 60 It Stores Block, paragraph 44. Decision : ATCO Gas South, Carbon Facilities - Part 1 Module Jurisdiction, (2005/2006 Carbon Storage Plan), Application No , February 5, Decision , page 27. Carbon, paragraph 23. Carbon, paragraph 25. AUC Decision (November 26, 2013) 15

20 found that the failure of the EUB to recognize the fundamental change in the role played by the Carbon storage facility once it lost all of its operational purposes was unreasonable. 61 The court went on to state: [i]f the Carbon storage facility does not now meet the requirements of s. 37, the appellant is entitled to a ruling to that effect The court further found that the concept of assets remaining in rate base indefinitely was contrary to the Stores Block decision. The court stated: The Act does not contain any provision or presumption that once an asset is part of the rate base, it is forever a part of the rate base regardless of its function. The concept of assets becoming dedicated to service and so remaining in the rate base forever is inconsistent with the decision in Stores Block (at para. 69). Such an approach would fetter the discretion of the Board in dealing with changing circumstances. Previous inclusion in the rate base is not determinative or necessarily important; as the Court observed in Alberta Power Ltd. v. Alberta (Public Utilities Board) (1990), 72 Alta. L.R. (2d) 129, 102 A.R. 353 (C.A.) at pg. 151: "That was then, this is now." The Court of Appeal referred to the finding in Stores Block that customers do not obtain an ownership interest in the assets of the utility in holding that the same principle applies to the revenues generated from those assets. The court stated: The service that they are entitled to is the delivery of gas on reasonable and just terms, not revenue generation. Just as the end customers have no ownership interest in the assets of the utility, they have no interest in the profits, unregulated revenues, or unregulated businesses of the utility Harvest Hills 51. EUB Decision related to an application by ATCO Gas to subdivide certain lands in the Harvest Hills area of Calgary which were included in rate base. The portion of the subdivided lands being used for utility purposes would be retained in rate base and the remaining portion of the lands (vacant property) would be sold to a third party with the net proceeds of sale being retained by the utility shareholder. 52. The EUB applied the no harm test to the proposed transaction and determined that financial harm would result to customers because ATCO Gas anticipated the need to construct new facilities with a five kilometre radius of the Harvest Hills property within five years which would require the acquisition of new property. 53. The EUB considered whether approval of the sale transaction could be conditioned to attach the proceeds of sale in a manner contemplated by paragraph 77 of the Stores Block decision where the Supreme Court of Canada stated: This is not to say that the Board can never attach a condition to the approval of sale. For example, the Board could approve the sale of the assets on the condition that the utility company gives undertakings regarding the replacement of the assets and their Carbon, paragraph 27. Carbon, paragraph 28. Carbon, paragraph 29. Carbon, paragraph 30. Decision : ATCO Gas, Disposition of Land in the Harvest Hills Area, Application No , December 11, AUC Decision (November 26, 2013)