Decision ATCO Utilities. Corporate Cost Allocation Methodology. September 20, 2010

Transcription

1 Decision Corporate Cost Allocation Methodology September 20, 2010

2 ALBERTA UTILITIES COMMISSION Decision : Corporate Cost Allocation Methodology Application No Proceeding ID. 306 September 20, 2010 Published by Alberta Utilities Commission Fifth Avenue Place, 4th Floor, Street SW Calgary, Alberta T2P 3L8 Telephone: (403) Fax: (403) Web site:

3 Contents 1 INTRODUCTION BACKGROUND DETAILS OF THE APPLICATION DISCUSSION OF ISSUES Compliance with Directions from Decisions and COMMISSION FINDINGS ORDER APPENDIX 1 PROCEEDING PARTICIPANTS APPENDIX 2 SUMMARY OF COMMISSION DIRECTIONS AUC Decision (September 20, 2010) i

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5 ALBERTA UTILITIES COMMISSION Calgary Alberta Decision ATCO UTILITIES Application No CORPORATE COST ALLOCATION METHODOLOGY Proceeding ID INTRODUCTION 1. On September 23, 2009, the Alberta Utilities Commission (Commission) received an application (Application) from the, including ATCO Electric Ltd., ATCO Gas and ATCO Pipelines (both divisions of ATCO Gas and Pipelines Ltd.). The Application sought approval of the current methodology (Methodology) and model (Model) used by Canadian Utilities Ltd. and CU Inc. (ATCO Corporate Office) for allocation of common costs (Corporate Office Costs) for governance, financial and administrative services that cannot be more directly assigned on a cost efficient basis. These costs are provided by the ATCO Corporate Office to the ATCO group of companies, including the. 2. The Application includes, as Attachment 1, a report prepared by KPMG LLP (KPMG) entitled (ATCO Electric, ATCO Gas, ATCO Pipelines) Corporate Service Cost Allocation Model Review dated September 2009 (KPMG Report). 3. The Commission issued Notice of the Application (Notice) on September 30, 2009 via to parties on the Commission s distribution list for electric and gas utility proceedings. The Notice required that interested parties submit a Statement of Intent to Participate (SIP) by October 16, The Commission received SIPs from the Office of the Utilities Consumer Advocate (UCA), the Consumers Coalition of Alberta (CCA), and ENMAX Corporation. 4. The Commission established the following written process and schedule (as revised) to deal with the Application: Process Step Deadline Date Information Requests to November 16, 2009 Information Responses from November 30, 2009 Commission Information Requests to February 5, 2010 Information Responses from February 9, 2010 Intervener Evidence April 26, 2010 Information Requests on Intervener Evidence May 10, 2010 Information Responses from Interveners May 25, 2010 Rebuttal Evidence June 8, 2010 Simultaneous Argument June 21, 2010 Simultaneous Reply Argument July 5, The Commission considers that the record for this proceeding closed on July 5, 2010 with the filing of Reply Argument. The division of the Commission assigned to deal with this matter consisted of Commissioners Mark Kolesar (Panel Chair), Anne Michaud and Moin Yahya. AUC Decision (September 20, 2010) 1

6 6. In reaching its determinations set out within this Decision, the Commission has considered the record of this proceeding, including the Argument and Reply 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. 2 BACKGROUND 7. In Decision the Alberta Energy and Utilities Board reviewed the issue of the allocation of Corporate Office Costs. The characterized these costs in that proceeding as follows: ATCO submitted these costs were allocated to each of the Applicants with respect to costs incurred by CUL and CU Inc. ATCO suggested the costs assisted the Applicants to function as corporations. The costs included audit fees, listing fees, fees for the preparation of the annual report and fees for Directors. ATCO submitted the costs also included general administrative corporate costs such as salaries and benefits, travel, office expenses and rent. ATCO submitted that the performance of head office and corporate functions on behalf of the applicants was a necessary and appropriate expense for the utilities, and that the performance of those functions by CUL and CU Inc. remained prudent and consistent with just and reasonable rate making. Those functions were more efficiently incurred through the parent company than through each individual utility The Methodology for the allocation of Corporate Office Costs was described in the KPMP Report as follows: 3.0 Background ATCO Corporate Office utilizes a cost allocation model and a three-factor composite financial formula to attribute a portion of its corporate services to the. The following sections set out discussion of allocation methodology principles, the current organizational structure and the allocation methodology in the Model. 3.1 Allocation Methodology Principles Cost allocation methodology used to attribute costs from a corporate office or shared services organizational structure to subsidiary companies should be designed to follow cost allocation principles. These principles can be summarized through three key steps illustrated below to determining how costs should be allocated to ensure subsidiaries receive costs that are representative of the support their businesses receive. 1 2 Decision : ATCO Group Affiliate Transactions and Code of Conduct Proceeding Part A: Asset Transfer, Outsourcing Arrangements, and GRA Issues (Application No ) (Released: July 26, 2002). Decision , page AUC Decision (September 20, 2010)

7 Step 1: Direct Cost Assignment Where costs at the corporate or shared services level can be identified as incurred on behalf of a specific subsidiary, they should be directly assigned to that subsidiary and removed from the group of corporate or shared services costs to be allocated more generally among the subsidiaries. Step 2: Allocation Based on Causation Where costs at the corporate or shared services level can not be specifically assigned to a subsidiary, are more general in nature and can be logically allocated using an identified cost causation driver such as head count, square footage or other volumetric measure, they should be allocated based on that volumetric measure. Step 3: Allocation Based on Formula Where costs at the corporate or shared services level can not be specifically assigned and a specific cost causation driver is difficult to identify, they can be allocated based on a formula designed to reflect the underlying reasons for the existence of these costs. This category of costs typically includes general services that are fiduciary or governing in nature In argument, the confirmed the above description of the Methodology: The filing confirms that recourse to the allocation formula only occurs once it has been determined that the subject cost(s) cannot be directly assigned and cannot be logically assigned using a specific cost causation driver It is the allocation of costs that properly fall into the Step 3: Allocation Based on Formula category that are then allocated under the Model that are the subject of this Proceeding. 11. The Model was also described in the KPMG Report. The Model is based on a threefactor financial composite formula which allocates costs among companies in the ATCO group of companies that can not be directly assigned to an individual company (Step 1 of the Methodology) or allocated to individual companies based on cost causation (Step 2 of the Methodology). The three-factor financial composite formula is the arithmetical average of operating revenues, total assets, and capital expenditures and was intended to reflect the underlying investment and activity of each of the ATCO companies. 5 The Model is summarized at page 6 of the KPMG Report as follows: 3.3 The Model Methodology ATCO Corporate Office provides some services of a fiduciary nature to the ATCO Utilities that can not be directly attributed to these companies or appropriately allocated based on a specific cost causation driver. The following provides a high level summary of how these costs are allocated from ATCO Corporate Office to the KPMG Report, page 5. Argument, paragraph 7. KPMG Report, page 11. KPMG Report, page 6. AUC Decision (September 20, 2010) 3

8 The Model Operating Revenues Multiply the percentages Total Assets Divide each subsidiary for each of the ATCO amount by the total of all Utilities by the ATCO The subsidiaries and divide Corporate Office budget by 3 true up at year end for Capital Expenditures actuals 12. In Decision the Board gave the certain directions with respect to the continued verification and tracking of Corporate Office Costs and the periodic review of allocation methodologies and cost drivers. The Board stated: Further, the Board believes ATCO s methodology should be reviewed periodically to test the allocation validity, to determine if other cost drivers would be more appropriate, and if corporate costs/activities have changed significantly. 7 To assist the Board, effective forthwith, the Board directs ATCO to maintain sufficient records to enable future review. At a minimum, corporate administration costs should be tracked by function The requirement for periodic review of allocation methodologies and cost drivers was again addressed in Decision : 9 While the stand alone study looked at the costs associated with provision of corporate services from a stand alone perspective, the study did not review the allocation validity. Given the passage of time since the Board issued Decision , the Commission considers that it would be appropriate to review the allocation methodology to determine if other cost drivers would be more appropriate in allocating corporate costs to AE and the other ATCO regulated utilities. Therefore, the Commission directs AE or the ATCO Utilities to propose a timeframe for reviewing the corporate cost allocation methodology by February 27, The Application was filed in response to the above direction from the AUC Decision , page 92. Decision , page 93. Decision : ATCO Electric Ltd., Stand Alone Study (Application No ; Proceeding ID. 18) (Released: October 21, 2008). Decision , page 7. 4 AUC Decision (September 20, 2010)

9 15. In a letter dated February 27, 2009 the informed the Commission that they would retain an independent third party to review the Methodology and would submit the Application by September 30, The retained the services of KPMG to conduct an independent third party review of the Methodology and drivers used in the Model in order to determine if the Model was still valid and to assess the appropriateness and effectiveness of the drivers used in the Model for the services provided and prepare a report based on the results. 11 The Application was filed following the completion of the KPMG Report. 17. On December 21, 2009 the UCA filed a motion suggesting that the KPMG Report was insufficient to comply with the direction of the Commission in Decision The UCA requested the Commission to direct to file a new report or, in the alternative, direct full and adequate responses to certain UCA information request responses. 18. On March 11, 2010 the Commission ruled on the UCA motion denying the request for a new report but directing (AU) to provide full and adequate responses to certain information requests from the UCA and from the Commission by March 17, In making its ruling the Commission noted: 8. The validity of the KPMG report and the allocation methodology used by AU with respect to corporate costs are the central issues in this Application While denying the UCA s request to rule that the KPMG Report failed to meet the directions of the Commission in , the Commission concluded this portion of the ruling by stating: 12. The persuasiveness of the evidence put forward by AU will ultimately be determined in the decision on this proceeding after a consideration of the entire record. Allowing this proceeding to continue does not prevent the Commission from determining the merits of any of the submissions or from directing the production of additional documentation in respect of future periods in subsequent proceedings DETAILS OF THE APPLICATION 20. The submitted that the Application and the KPMG Report complied with the directions of the Commission set out in Decision The stated that the KPMG Report was an independent third party review of the corporate cost allocation methodology and drivers used in the Model, and that the Report determined that the Model was still valid and assessed the appropriateness and effectiveness of the drivers used in the Model for the services provided KPMG described its approach in conducting its review of the Model as follows: KPMG s approach to reviewing the Model and methodology involved assessing the reasonability of the allocation methodology and the appropriateness and effectiveness of Application, paragraph 5. Ruling of the Commission dated March 11, 2010, paragraph 8. Ruling of the Commission dated March 11, 2010, paragraph 12. Application, paragraph 5. AUC Decision (September 20, 2010) 5

10 the drivers used for the services provided. KPMG s assessment is founded on an understanding and analysis of the Model used by ATCO Corporate Office and the services received by the KPMG described the steps it undertook in preparing its report which included consultations with ATCO personnel, review of ATCO policies, the ATCO Group Inter-Affiliate Code of Conduct, service agreements between the ATCO Corporate Office and the ATCO Utilities, historical regulatory submissions and cost allocation models, the Model and market research and analysis With respect to reviewing the costs allocated under Step 3: Allocation Based on Formula, in the Model, KPMG stated: KPMG reviewed the services provided under the Service Agreements to the extent required to confirm that they could not be directly assigned to the nor appropriately allocated based on a specific cost causation driver on a cost efficient basis With respect to KPMG s conclusions on the Model based on the public research undertaken, KPMG stated: To determine the reasonability of the Model and the appropriateness and effectiveness of the financial composite formula used for the services provided, KPMG gathered publicly available information from which to perform its comparative analysis. KPMG found this body of research to be sufficient in supporting the validity of the allocation methodology The referred to the following summary findings of the KPMG Report, which appear at pages 11 and 12 of the Report: In conclusion, KPMG s findings are summarized as follows: The operate under the shared services structure of ATCO Corporate Office for fiduciary types of costs; it is common within the utility industry to operate under a shared services structure to share overhead costs, specific expertise, and to obtain economies of scale; and KPMG finds this structure to be appropriate and reasonable; The services allocated by ATCO Corporate Office are fiduciary in nature, governed under Service Agreements with the, and align appropriately with the use of a financial composite formula to allocate corporate service costs to subsidiaries; and KPMG finds the ATCO Corporate Office three-factor financial composite formula to allocate corporate service costs through the Model to be representative of the underlying reasons for the existence of these costs in KPMG Report, page 7. KPMG Report, page 7. KPMG Report, page 8. KPMG Report, page 9. 6 AUC Decision (September 20, 2010)

11 support of the (i.e. operating revenue, total assets, and capital expenditures) and that the approach is thoroughly documented. 26. Based on review of the results of the KPMG Report, the proposed no change to the current Methodology utilized to allocate costs to the for services provided by ATCO Corporate Office requested 20 that the Commission issue the following order: The methodology for determining the allocation of costs for services provided to the by ATCO for the purpose of determining the revenue requirements of each of the in subsequent GRA/GTAs, shall continue to be the percentage determined by the arithmetical average of Operating Revenues, Total Assets and Capital Expenditures. 4 DISCUSSION OF ISSUES 4.1 Compliance with Directions from Decisions and As noted above, the Commission s ruling of March 11, 2010 stated: The validity of the KPMG report and the allocation methodology used by with respect to corporate costs are the central issues in this Application. The Commission s ruling left the determination of whether the Application and the KPMG Report complied with the Commission s directions in Decisions and (Commission Directions) to this Decision. 29. Both the UCA and provided evidence and argument on whether the Application and the KPMG Report complied with the Commission Directions. 30. As noted above, the took the position that the Application and the KPMG Report fully complied with the Commission Directions. In Argument the stated: 2. The September 23, 2009 Application responded fully to the Direction and provided detailed information, including an independent expert report authored by KPMG, that examined the potential use of other cost drivers and the reasonableness of continuing to use the existing allocation methodology. 4. As confirmed by the KPMG Report, the approach utilized by the remains appropriate and is consistent with methodologies used in similar circumstances by the peer group that was examined. As such, the current cost allocation methodology continues to yield reasonable results and should be accepted and approved by the Commission The UCA submitted that the Application and the KPMG Report do not meet the requirements of the Commission Directions. The UCA stated: 13. The KPMG Report has not addressed the concern of the Commission or its predecessor. The report fails to evaluate any alternate cost drivers facing ATCO. A simple opinion was not what the Commission or its predecessor required. KPMG s report Application, page 5, paragraph 11. Application, page 6, paragraph 13. Argument of the dated June 21, 2010 paragraph 2 and 4. AUC Decision (September 20, 2010) 7

12 contains no analysis of alternative cost drivers. How can it be reasonably determined if other cost drivers would be more appropriate if there is no analysis of their comparative benefits? What KPMG provided was merely a high level comparison of the allocations used by ATCO to a select set of comparators without any detailed analysis of the impact of the cost drivers impacting ATCO The UCA noted that KMPG had acknowledged in UCA-AU-4 (c) that it undertook no analysis of time records of ATCO Corporate Office, conducted no time and motion studies (or similar studies) to analyze the actual effort spend (sic) by each employee or function working on activities related to each utility. 33. The UCA further submitted that the KPMG Report is deficient in complying with the Commission Directions because its conclusions with respect to the Methodology and the Model are unsupported by its research findings. The UCA referred to the Massachusetts Allocation methodology which uses revenues, assets and labour 23 to allocate costs rather than operating revenues, assets and capital expenditures as used in the three-factor financial composite formula used by ATCO in the Model. The UCA stated: 24.the KPMG report does not support the ATCO composite methodology. The ATCO Corporate methodology is based on Revenue, Assets and Capital Expenditures, the Massachusetts formula uses Revenues, Assets and Labour. The KPMG report does not explain why ATCO should differ from the typical implementation of the Massachusetts formula. Nine of the twelve comparators use some form of the Massachusetts formula that includes labour. 25 ATCO provided the allocation percentages using the ATCO methodology and the Massachusetts formula for ATCO for The percentages for General Costs are: 2008 ATCO Allocation Massachusetts Allocation ATCO Electric 23.0% 30.5% ATCO Gas 23.8% 20.7% ATCO Pipelines 7.2% 7.7% 26 The percentages are different between the two allocation methodologies. Without more detailed analysis, there is no way to know which is correct. The UCA desires to ensure that, as much as possible, customers only pay for the services received. 24 (footnotes omitted) 34. The UCA proposed the following three step model to test the ATCO allocation methodology: Step 1 Remove the cost items which should not be allocated to utility customers UCA Argument dated June 21, 2010, paragraph 13. KPMG Report, page 11. UCA Argument dated June 21, 2010, paragraphs AUC Decision (September 20, 2010)

13 Step 2 Examine detailed cost drivers for each cost area and do a detailed allocation of the costs. Step 3 Compare the result of the detailed allocation to the proposed allocation methodology In Argument the UCA qualified the intention of its three step model stating: In its evidence and this Argument, the UCA does not recommend that the global allocation methodology be abandoned, but a study using a more granular basis for allocating costs be conducted to test the current allocation methodology In explaining the first step of its proposed three step model, the UCA suggested that disallowed costs should not be allocated to the and included in customer rates. In AUC-UCA 3(b) the UCA indicated that it was not suggesting that disallowed costs had been improperly allocated to the but that the methodology they proposed would clarify which costs were included and which were excluded. The UCA also suggested that the costs associated with certain activities occurring at the Corporate Office and listed in Appendix A of the KPMG Report which did not benefit the should be identified and excluded from the Corporate Office Costs allocated to the utilities through the Model. These costs were identified as: Country Risk Assessment External Relations Security for the Changing Fortunes Round Table Long term and short term incentive plans and employee stock purchase plans Reputation Management Co-ordinate Community Investment In step 2 of the UCA model (examine detailed cost drivers for each cost area and do a detailed allocation of the costs), the following were recommended by the UCA as allocators to test the high level allocators: 28 The number of threats by company is an alternate allocator that could be used in an evaluation of threats to corporate infrastructure. The number of investigations for each company is a good indicator of the cost of the Investigation and Forensics area. As with Investigations and Forensics, the number of investigations is a driver that should be used in an assessment of security clearance investigations The number of international trips would be a better allocator for International Travel. The number of executives that have drivers and the company they serve is a better allocator for executive drivers. The number of Background and Due Diligence investigations is a better allocator for these costs. The number of vehicle leases is a better allocator of executive leases. The number of property leases and property development projects is a better allocator of real estate management UCA Evidence, answer 7. UCA Argument, paragraph 3. UCA Evidence, pages 4 and 5. UCA Argument, paragraph 32. AUC Decision (September 20, 2010) 9

14 An alternate allocator that more directly related to the Human Resources costs would be payroll or employees in each company. The outcome of the ATCO Pension Proceeding would provide good allocators for allocating the costs of managing the pension plans. The number of leadership positions is a good allocator for allocating Organizational Development Costs. The number of subsidiaries served would also impact the costs and should be explored as an allocator for the Corporate Secretary Function. Internal Audit should be tested by using Audit Hours. The allocation of Information Technology Support costs is best allocated by IT Spend for each company. Insurance costs should be allocated based on insured value or number of claims. Finance and Controller costs should be allocated based on the number of companies supported. Treasury costs should be allocated based on the number of financing requirements or issuances of financing. (footnotes omitted) 38. For the following services identified in the Corporate Secretary function, the UCA recommended cost allocation based on the number of subsidiaries. 29 Compliance with statutes and regulations, reporting on legal matters and public company disclosure requirements. Maintenance of corporate documents and legal records as well as an electronic database for the and their legal entities; corporate records management and retention. Directors expenses. Shareholder expenses and legal fees. Organizes meetings and agendas; prepares minutes from Board and other meetings. Preparing and filing the necessary annual and periodic returns with governing authorities for the and their legal entities. Drafting, circulation and approval of annual written Board resolutions, in addition to adhoc resolutions required throughout the year. Arrange for the execution and approval of financial statements. Maintain unanimous shareholders agreements for the. Prepare for year end Designated Audit Director (DAD) meeting. Prepare and track Directors remuneration and taxation filings. Maintain all trademark related matters; licenses and agreement for the ATCO Utilities. Application of the corporate seal for the and their legal entities. (footnotes omitted) 39. With respect to the third of the proposed steps (compare the result of the detailed allocation to the proposed allocation methodology) the UCA stated: 35 If the high level allocation proves a reasonable proxy for the detailed analysis, the high level allocation methodology can continue for a period of time. 30 (footnote omitted) UCA Argument, paragraph 33. UCA Argument, paragraph AUC Decision (September 20, 2010)

15 40. In argument, the referred to the UCA s three step proposal and suggested that the UCA had misinterpreted the detailed lists of Corporate Office services provided in Appendix A to the KPMG Report. The stated: these detailed lists simply indicated the types of activities that come within or under each Head Office service. This permitted the reader to understand the variety of tasks performed by these persons in Head Office providing each service. As well, it provided insight into the fact that varying tasks would be performed for the to different degrees at different points in time. This information did not profess to track each task, each day to every corporate entity. These services are provided to all ATCO Group Companies in varying degrees. Hence, an allocation formula is used to assign an appropriate share of costs to each entity (regulated or unregulated) The concluded by stating that a total overhaul of the system of accounts would be required to implement the UCA s proposed approach COMMISSION FINDINGS 42. The directions set out in Decisions and require the Methodology and Model to be reviewed periodically for the following purposes: 1) To determine if Corporate Office Costs or Corporate Office activities have changed significantly since the last periodic review. 2) To determine if a valid cost causation relationship between one or more cost drivers and any of the costs presently included within the Step 3 Allocation Based on Formula category can be identified, thereby enabling costs to be moved out of that category and into either the Step 1: Direct Cost Assignment or Step 2: Allocation Based on Causation categories of costs. 3) To test the continuing validity of the allocation process and the Model employed in Step 3: Allocation Based on Formula. 43. In addition, Decision required the to maintain sufficient records to enable future regulatory review. To this end, at a minimum, corporate administration costs were required to be tracked by function. 44. The requirement to periodically test the continuing validity of the allocation process employed in Step 3 Allocation Based on Formula requires the to test the method relative to other methods of allocation and provides evidence that the allocation method selected remains superior to alternative allocation methods. Such an examination should review other cost allocation methods and provide support for the methodology selected. Such a periodic review should be undertaken whenever utility management, acting prudently in the circumstances, considers it necessary in order to meet the utility s burden of proof that such costs are just and reasonable and should be included in revenue requirement The Argument, paragraph 10. The Argument, paragraph 11. AUC Decision (September 20, 2010) 11

16 45. In order to assess whether a valid cost causation relationship between one or more cost drivers and any of the costs presently included within the Step 3 Allocation Based on Formula category can be identified, the Commission considers that it is necessary to review each of the types of allocated indirect costs for indications that a valid causal relationship may have developed since that last review was undertaken. Changes in corporate structure, changes in operations, and changes in the nature of the subject costs or the underlying Corporate Office activities and improvements or foreseeable improvements in cost accounting, tracking and data management should all be considered, as required. If a cost causation relationship can be identified and proven, the applicable cost should then be moved out of the Step 3 Allocation Based on Formula category and into either the Step 1 Direct Cost Assignment or Step 2: Allocation Based on Causation categories of costs. 46. In applying the above analysis of what is necessary to fully comply with the Commission Directions to the Application and the KPMG Report, the Commission finds an overall level of general compliance. In this regard, the Commission notes that the engaged a third party expert who conducted an independent review of the Model, developed a set of criteria from which to assess the formula employed in the Model, reviewed the ATCO corporate structure, reviewed documentation related to the Corporate Office Costs, conducted research to confirm that shared service type structures are common in the utility industry and that the type of costs (fiduciary in nature) are such that they are appropriately allocated based on a financial composite type of formula, and concluded the three-factor composite formula used in the Model to be representative of the underlying reasons for the existence of these costs However, the Commission has several concerns with the completeness in the KPMG Report. One such concern is with the assessment undertaken of alternative cost drivers for the costs presently allocated by the Model. The Commission notes that KPMG indicated in the Report that it assessed the appropriateness and effectiveness of the drivers used for the services provided. 34 This position was reasserted in argument where the stated: the KPMG Report clearly shows that KPMG looked at the services being provided and determined that the specific services were general, not company specific, and hence required allocation. KPMG examined a peer group for comparison purposes and assessed the alternate drivers used by the members of this group and their applicability to the ATCO situation However, the Commission finds that the evidentiary support for these conclusions is lacking. The Commission agrees with the UCA when it stated: What KPMG provided was merely a high level comparison of the allocations used by ATCO to a select set of comparators without any detailed analysis of the impact of the cost drivers impacting ATCO Further, the Commission notes the following limitations in the KPMG analysis which are specified at page 4 of the KPMG Report: For the purposes of this engagement and the results of this report, the following items were not included in the scope of KPMG s review: KPMG Report, page 12. KPMG Report, page 7. The Argument, page June 21, 2010, paragraph 14. UCA Argument dated June 21, 2010, paragraph AUC Decision (September 20, 2010)

17 A review of the necessity of services provided A review of the costs allocated in the Model for the services provided. 50. In the Commission s view, the KPMG analysis falls short in part because a review of the necessity of the costs and verification (without conducting an audit) of the quantum of the costs allocated in the model was not undertaken as an initial step in the methodology review. Such a review would be necessary to confirm that the Corporate Office Costs or Corporate Office activities have not significantly changed and that the costs included in the allocation model continue to be applicable. Although AUC-ATCO-1(b) did list corporate activities which have changed, it did not quantify the costs of those changes, it did not discuss the impact of those changes on the organization, nor did it comment on whether the costs for those changes could be directly assigned to any of the ATCO affiliates. 51. The Commission Directions from Decisions and require a periodic check on the continuing validity of the allocation process and the Model employed in Step 3 Allocation Based on Formula. The Commission finds the degree of support for the continued validity of the Model to be insufficient. KPMG, in AUC-ATCO-13(b), observed that most comparator companies used an allocation methodology that dealt with a mix of head office and shared services costs unlike ATCO (where the Corporate Office Costs are primarily head office costs) and, as a result, some of the comparator companies use a more detailed allocation model. Consequently, in the Commission s view, the evidence was lacking as to why the current Model continued to be the best for the allocation of ATCO Corporate Office Costs. The Commission found the explanations of the research and analysis undertaken by KPMG, as provided in AUC- ATCO-13, 14 and 15 and the KPMG Rebuttal Evidence, helpful. However, the explanations were generally at a high level and insufficient to provide clear support for KPMG s assertion that the Model continued to be the best method for both the and ratepayers. 52. As the UCA pointed out, neither the nor KPMG provided a detailed explanation of why the three-factor financial composite formula used in the Model is superior to the other formulae reviewed (including the Massachusetts model). While in AUC-ATCO-14 KPMG did provide its overall assessment of the suitability of the Massachusetts model for ATCO, it did not explain why labour costs should not be considered in the ATCO allocation formula (as labour is included in the Massachusetts model). KPMG also did not explain why some measure of the risk assessment of a particular affiliate could or could not have been included in the formula or the merits of any other potential cost allocators. In AUC-ATCO-14 KPMG stated: KPMG is of the view however, that although other multiple-factor financial formulas such as the Massachusetts Formula are an option, it would result in no more or less accuracy or appropriate allocation to the ATCO subsidiaries. The ATCO subsidiaries are generally capital intensive in nature and therefore KPMG considers the composite formula chosen by ATCO to be rational and reasonable. 53. While KPMG attempted to clarify its position, the explanations did not provide any detailed discussion or analysis as to why the other comparable formulae were not selected. 54. The Commission finds some merit in the three-step model proposed by the UCA however, given the evidence that such a proposal cannot be implemented without incurring substantial costs, the Commission is not prepared to direct ATCO to implement this proposal. The Commission will nonetheless require the to refine AUC Decision (September 20, 2010) 13

18 its periodic review of the Corporate Cost Allocation Methodology, as specifically directed below. 55. While the Commission has noted difficulties with the evidentiary support for the Application and the KPMG Report, and noted some merit in the UCA s three-step model proposal, it has not been persuaded that there is sufficient reason to require additional reports or studies at this time; nor is the Commission persuaded that it should alter the current Corporate Cost Allocation Methodology or the Model at this time. In this regard, the Commission notes that the UCA is not requesting a new allocation methodology; it is requesting a proper testing of the existing allocation methodology. 37 In these circumstances, the Commission is prepared to accept the Application and the KPMG Report as support for continued use of the current Methodology and the Model for determining the allocation of costs for services provided to the by the ATCO Corporate Office for the purpose of determining the revenue requirements of each of the until such time as the Commission may direct otherwise. Corporate Office Costs that are allocated under the Model shall continue to be on the basis of the percentage determined by the arithmetical average of Operating Revenues, Total Assets and Capital Expenditures. 56. Given the number of concerns noted in this Decision with respect to the scope of information and analysis provided for in the Application and the KPMG Report, the Commission considers that the next periodic review of the Methodology and the Model should be provided on or before September 30, In the next review application, the are directed to specifically include the following, having regard to the guidance provided by this Decision: (1) A review of the necessity of the Corporate Office services provided to the regulated utilities. The review should include an examination of Corporate Office Costs for possible exclusion on the basis that they should not be included in rates for the ATCO Utilities. (2) A validation (without conducting an audit) of the quantum of the Corporate Office Costs allocated in the Model for the services provided. (3) Confirmation, supported by analysis, that the Corporate Office Costs allocated in the Model for the services provided cannot be directly assigned to individual companies (Step 1 of the Methodology) nor can those costs be allocated to individual companies based on cost causation (Step 2 of the Methodology), on a cost efficient basis. (4) An analysis of the three-factor financial composite formula employed in the Model as compared to alternative formulae, including the Massachusetts Formula. The analysis should provide sample detailed calculations, and assessments as to why the chosen formula is superior to the comparator formulae. 37 UCA Argument, paragraph AUC Decision (September 20, 2010)

19 6 ORDER 57. IT IS HEREBY ORDERED THAT: (1) The Application is approved subject to the directions set out in this Decision. Dated on September 20, ALBERTA UTILITIES COMMISSION (original signed by) Mark Kolesar Panel Chair (original signed by) Anne Michaud Commissioner (original signed by) Moin A. Yahya Commissioner AUC Decision (September 20, 2010) 15

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21 APPENDIX 1 PROCEEDING PARTICIPANTS Name of Organization (Abbreviation) Counsel or Representative (ATCO Electric Ltd., ATCO Gas and ATCO Pipelines) L. Keough Office of the Utilities Consumer Advocate (UCA) R. McCreary Consumers Coalition of Alberta (CCA) J. A. Wachowich ENMAX Corporation G. Weismiller Alberta Utilities Commission Commission Panel M. Kolesar, Panel Chair A. Michaud, Commissioner M. A. Yahya, Commissioner Commission Staff B. McNulty (Commission Counsel) D. Ward R. Armstrong, P.Eng. P. Howard D. Cherniwchan AUC Decision (September 20, 2010) 17

22 APPENDIX 2 SUMMARY OF COMMISSION DIRECTIONS This section is provided for the convenience of readers. In the event of any difference between the Directions in this section and those in the main body of the Decision, the wording in the main body of the Decision shall prevail. 1. Given the number of concerns noted in this Decision with respect to the scope of information and analysis provided for in the Application and the KPMG Report, the Commission considers that the next periodic review of the Methodology and the Model should be provided on or before September 30, In the next review application, the are directed to specifically include the following, having regard to the guidance provided by this Decision:... Paragraph 56 (1) A review of the necessity of the Corporate Office services provided to the regulated utilities. The review should include an examination of Corporate Office Costs for possible exclusion on the basis that they should not be included in rates for the. (2) A validation (without conducting an audit) of the quantum of the Corporate Office Costs allocated in the Model for the services provided. (3) Confirmation, supported by analysis, that the Corporate Office Costs allocated in the Model for the services provided cannot be directly assigned to individual companies (Step 1 of the Methodology) nor can those costs be allocated to individual companies based on cost causation (Step 2 of the Methodology), on a cost efficient basis. (4) An analysis of the three-factor financial composite formula employed in the Model as compared to alternative formulae, including the Massachusetts Formula. The analysis should provide sample detailed calculations, and assessments as to why the chosen formula is superior to the comparator formulae. 18 AUC Decision (September 20, 2010)