Decision The ATCO Utilities. Corporate Costs. March 21, 2013

Transcription

1 Decision Corporate Costs March 21, 2013

2 The Alberta Utilities Commission Decision : Corporate Costs Application No Proceeding ID No March 21, 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 Background Compliance with Decision and discussion of issues Review of the necessity of corporate office services Review of the total dollar amount of corporate office costs Review of whether any corporate costs can be directly assigned or causally allocated on a cost efficient basis Review of the allocation methodology ATCO Gas Australia acquisition and impact on 2012 corporate costs Revision to forecast of total corporate costs. Allocated corporate costs for 2012 for ATCO Electric Ltd. and ATCO Gas Other Order Appendix 1 Proceeding participants Appendix 2 Summary of Commission directions List of tables Table 1. E&Y cost allocation formulae summary Table 2. Corporate allocated cost pool for 2012 (net of the excluded/disallowed costs of $0.7 million) AUC Decision (March 21, 2013) i

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5 The Alberta Utilities Commission Calgary, Alberta Decision Application No Corporate Costs Proceeding ID No Introduction 1. 1 filed an application with the Alberta Utilities Commission (the AUC or the Commission) on June 4, 2012, regarding corporate costs. The application was made in response to AUC Decisions and , 3 as well as a ruling made by the Commission as part of Proceeding ID No requested approval of the corporate costs for ATCO Electric Ltd. and ATCO Gas for the year also requested approval for the continued use of the corporate costs allocation methodology after making a change for the internal audit function. indicated that, in calculating the 2012 forecast allocated corporate costs included in the application for ATCO Gas and ATCO Electric Ltd., the ATCO Ltd. general allocation formula approved in Decision was used and it incorporated the revenue, capital expenditures and fixed asset amounts for ATCO Gas Australia. added that this resulted in approximately six per cent of corporate costs for 2012 being allocated to ATCO Gas Australia. 2. The Commission issued notice of the application on June 5, 2012, requiring that any party who wished to participate in this proceeding submit a statement of intent to participate (SIP) to the Commission by June 19, The Commission received SIPs from the following parties: AltaGas Utilities Inc. ENMAX Power Corporation AltaLink Management Ltd. EPCOR Distribution & Transmission Inc. The Office of the Utilities Consumer Advocate (UCA) The Consumers Coalition of Alberta 4. The UCA was the only intervening party who actively participated in the proceeding consist of two companies: ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd. ATCO Gas and Pipelines Ltd. consists of two divisions: (1) ATCO Gas, (2) ATCO Pipelines. Decision : ATCO Utilities, Corporate Cost Allocation Methodology, Application No , Proceeding ID. 306, September 20, Decision : ATCO Electric Ltd., Commission Initiated Review and Variance of Decision ATCO Electric Ltd General Tariff Application, Application No , Proceeding ID No. 1393, May 15, Proceeding ID No. 969 resulted in Decision : ATCO Gas (A Division of ATCO Gas and Pipelines Ltd.), General Rate Application Phase I, Application No , Proceeding ID No. 969, December 5, AUC Decision (March 21, 2013) 1

6 5. Through a series of letters, 5 the Commission established the following schedule to process the application: Process step Round 1 information requests (IRs) to the ATCO Utilities IR responses from the ATCO Utilities Intervener evidence IRs on intervener evidence IR responses from interveners Rebuttal evidence Round 2 IRs to the ATCO Utilities IR responses from the ATCO Utilities Written argument Written reply argument Deadline July 9, p.m. August 7, p.m. September 7, p.m. September 19, p.m. October 3, p.m. October 17, p.m. October 31, p.m. November 14, p.m. December 7, p.m. December 21, p.m. 6. The Commission considers that the record for this proceeding closed on December 21, 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 and arguments 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 related 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 a particular matter. 2 Background 8. ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd. are wholly-owned subsidiaries of CU Inc., which is in turn a wholly-owned subsidiary of Canadian Utilities Limited. Canadian Utilities Limited is a subsidiary of ATCO Ltd. 6 ATCO Ltd. uses a methodology to allocate certain corporate office costs of ATCO Ltd., Canadian Utilities Limited, and CU Inc. (corporate costs) to its subsidiary companies. 9. The issue of the allocation of corporate costs for the ATCO Utilities has been addressed in previous AUC Decisions. In Decision , 7 the Commission s predecessor gave the ATCO Utilities certain directions with respect to the continued verification and tracking of corporate costs and the periodic review of allocation methodologies and cost drivers. The requirement for a periodic review of allocation methodologies and cost drivers was addressed again in Decision , 8 in which the Commission directed the ATCO Utilities to propose a timeframe for reviewing the corporate costs allocation methodology. The subsequent application, Exhibits 12.01, 16.01, and Exhibit 3, application, Ernst & Young Report, paragraph 1.2. Decision : ATCO Group, Affiliate Transactions and Code of Conduct Proceeding Part A: Asset Transfer, Outsourcing Arrangements, and GRA Issues, Application No , July 26, Decision : ATCO Electric Ltd., Stand Alone Study, Application No , Proceeding ID. 18, October 21, AUC Decision (March 21, 2013)

7 which included a report prepared by KPMG LLP, was assigned Proceeding ID No. 306 and resulted in Decision In paragraph 56 of Decision , the Commission included the following direction: 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 ATCO Utilities 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. 11. On July 29, 2011, ATCO Ltd. acquired W.A. Gas Networks from WestNet Infrastructure Group and the DUET Group. W.A. Gas Networks, which was later renamed ATCO Gas Australia, is a natural gas distribution utility company that serves Perth, Australia. The acquisition also included WestNet s information technology division During the processing of ATCO Gas Phase I General Rate Application, 10 the UCA requested that the Commission create a process to explore the impact of the conditional agreement for Canadian Utilities Limited to acquire W.A. Gas Networks on the allocation of head office and business development costs. In its ruling on this request, 11 the Commission agreed with the UCA that this acquisition was a material event that could significantly impact the allocation of corporate costs to ATCO Gas as well as to the other ATCO utilities. 12 In the same ruling, the Commission noted that, in accordance with Decision , the next periodic review of the corporate costs allocation methodology was scheduled for September 30, The Commission considered that the impacts of the W.A. Gas Networks acquisition would be best examined in this scheduled proceeding; however, the Commission further considered that the September 30, 2012 date should be advanced to April 2, In the same ruling, the Commission stated that the ATCO Utilities should include in the April 2, 2012 application a request for approval of the corporate costs allocation methodology Exhibit 3, application, Ernst & Young Report, paragraph Proceeding ID No. 969 please refer to footnote 4. Proceeding ID No. 969, Exhibit Proceeding ID No. 969, Exhibit , paragraph 20. AUC Decision (March 21, 2013) 3

8 for 2012 for all the ATCO Utilities that had not otherwise had their revenue requirement with respect to 2012 corporate allocations previously finalized. Accordingly, the Commission stated that it would establish a placeholder in respect of the 2012 allocation of corporate costs to ATCO Gas. The Commission added that the placeholder would be set at the amount determined by the Commission in its decision in Proceeding ID No. 969 after having considered the ATCO Gas forecasts and the evidence and argument of the parties in that proceeding. 14. ATCO Electric Ltd. s forecast allocated corporate costs for 2012 were first addressed in Decision Due to the issue surrounding the acquisition of W.A. Gas Networks, on November 24, 2011, the Commission issued Decision in which it ordered that there would be a second stage review and variance of the forecast allocated corporate costs for 2012 for ATCO Electric Ltd. in order to establish whether a placeholder is necessary. In Decision , the Commission ordered the following: ATCO Electric Ltd. treat 2012 allocated corporate costs as a placeholder pending a future application of the corporate cost allocation methodology by the ATCO Utilities With respect to the forecast allocated corporate costs for ATCO Pipelines for 2012, the mechanism for calculating the revenue requirements for ATCO Pipelines for the years was arrived at through a negotiated settlement which was approved in Decision Section 3 of the negotiated settlement 17 approved in Decision outlines the process for determining operating and maintenance costs for Because the forecast allocated corporate costs for ATCO Pipelines are included as part of its operating and maintenance costs, the forecast allocated corporate costs for ATCO Pipelines for 2012 will be determined in accordance with Section 3 of the negotiated settlement, and not as part of this decision. 16. On March 16, 2012, counsel for the ATCO Utilities advised the Commission that, due to the volume of regulatory proceedings, the ATCO Utilities would not be able to file the corporate costs application until June 4, Compliance with Decision and discussion of issues 17. In making its determinations on this application, the Commission considers that it first has to assess the response provided to the direction included in Decision , as quoted in paragraph 10 of this decision. The UCA raised a number of issues in connection with the response provided, and these issues will be addressed by the Commission in the respective area to which the issues relate. Once the Commission has made its findings regarding the ATCO Utilities compliance with the direction in Decision , it will address the issue of the forecast allocated corporate costs for 2012 for ATCO Electric Ltd. and ATCO Gas Decision : ATCO Electric Ltd., Phase I Distribution Tariff Transmission Facility Owner Tariff, Application No , Proceeding ID No. 650, April 13, Decision : ATCO Electric Ltd., Decision on Preliminary Question Commission Initiated Review and Variance of AUC Decision ATCO Electric Ltd General Tariff Application, Application No , Proceeding ID No. 1393, November 24, Decision , paragraph 28. Decision : ATCO Pipelines, Revenue Requirement Settlement and Alberta System Integration, Application No , Proceeding ID No. 223, May 27, The negotiated settlement is included as Appendix 2 to Decision AUC Decision (March 21, 2013)

9 18. In the application, the ATCO Utilities stated that they engaged Ernst & Young (E&Y) to undertake an independent review of the four areas subject to direction by the AUC in Decision E&Y s report was submitted as an appendix to the ATCO Utilities application. 19. E&Y included its understanding of corporate costs as follows: 5.13 At the corporate level, ATCO provides certain services (the Corporate Services ) that provide benefit to the ATCO Group. ATCO breaks out the costs of these services in the following categories for rate application purposes: a) corporate office - labour and supplies, including the C-Suite executive team, security, real estate management, and special projects costs. b) Corporate office rent, comprising the rent costs relating to the buildings at th Avenue SW in Calgary and th Street NW in Edmonton. c) Finance and controller, comprising financial accounting, treasury and tax. d) Internal audit. e) Insurance. f) Information technology. g) Corporate secretary. h) Human resources. i) Corporate communications Further detail as to the component activities and elements of the above service are set out in Appendix D. ATCO corporate cost accounting and allocation 5.15 As part of its financial and regulatory accounting processes, ATCO allocates the costs associated with the Corporate Services as defined above (the Corporate Office Costs ) The following costs are excluded from allocated Corporate Office Costs: a) Incentive compensation expense. b) Share appreciation rights expense. c) Stock option expense Certain costs are directly assigned to the business units, including the following: a) Insurance premiums. AUC Decision (March 21, 2013) 5

10 b) External training courses. c) Regulatory costs. d) Aircraft usage costs The remaining Corporate Office Costs (the Corporate Office Costs Allocation Pool ) are allocated using the ATCO General Formula. The percentage allocations to each of ATCO Electric, ATCO Gas, ATCO Pipelines and the Other ATCO Entities are derived based on the arithmetic average of revenues, capital expenditures and total assets for each of the four business units. Costs are charged without mark up to the business units up to the limit of actual costs incurred. The head office department does not retain a credit at the completion of the cost allocation process. The amount charged to the business units is the lower of actual costs and budgeted costs. (footnote removed) 5.19 Certain costs, such as political and charitable donations, sponsorships of Spruce Meadows and certain periodic special projects such as those relating to the Vancouver Olympics and the Arctic Winter Games are initially included in the Corporate Office Costs Allocation Pool, but ATCO does not submit these costs to the AUC for rate setting purposes. Changes in corporate structure, operations and services 5.20 The corporate structure, operations and Corporate Services of the ATCO Group have remained substantially consistent since the last review of corporate costs by the AUC, with the exception of the effects of the acquisition of ATCO Australia The Corporate Office has not expanded its headcount as a result of the acquisition. The financial data used in applying the ATCO General Formula in this report do not include the revenues, capital expenditures and total assets for ATCO Australia The Commission questioned why the E&Y report was conducted and prepared without using financial data for ATCO Gas Australia while the allocated corporate costs being applied for in the application were calculated using financial data for ATCO Gas Australia. In response to information request AUC-AU-19(a), 19 the ATCO Utilities stated that this was primarily a timing issue, as the forecasted corporate costs used by E&Y were determined prior to the acquisition of ATCO Gas Australia. The Commission also questioned whether the conclusions contained in the E&Y report would change if the financial data for ATCO Gas Australia were used. In response, 20 the ATCO Utilities indicated that, given the corporate costs would not change with the addition of ATCO Gas Australia, the conclusions are not likely to change Exhibit 3, application, Ernst & Young Report, paragraphs 5.13 to Exhibit Exhibit 17.01, response to AUC-AU-19(b). 6 AUC Decision (March 21, 2013)

11 3.1 Review of the necessity of corporate office services 21. The direction from Decision included the following: In the next review application, the ATCO Utilities 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. response to the direction from Decision regarding the necessity of corporate office services 22. indicated that E&Y answered the following question to address this Commission direction. Question 1: Are there corporate services reflected in allocated or assigned corporate office costs which are not required for the performance of utility functions? indicated that the conclusion of E&Y was as follows: The body of our report describes the scope of our work, including the procedures we performed and the analyses we prepared. The following summary of our conclusions should be read in conjunction with the balance of our report. 1. We did not find any Corporate Services provided that are not required for the performance of utility functions E&Y indicated that its approach to addressing this question included gathering information through interviews with corporate office personnel and the operational and financial leaders of the ATCO Utilities. In addition, E&Y indicated that it reviewed and analyzed the detailed activities for each corporate service area listed in Appendix D of its report. E&Y added that this review and analysis was done to obtain an understanding of the specific activities that comprise corporate services, their contribution to the ATCO Utilities and whether there appeared to be duplication of services provided by the corporate office and business units. 25. E&Y submitted that it also reviewed AUC and other Canadian regulatory decisions that have spoken to the issue of which services are required for the provision of utility service. In addition, E&Y indicated that it reviewed the business cases prepared by ATCO Ltd. for prior AUC applications. Finally, E&Y stated that it quantified the costs, if any, that in its view should be removed from the corporate office costs allocation pool. 26. E&Y s analysis and findings are further described below. Corporate office labour and supplies 27. The corporate office labour and supplies cost centre includes the executive team which provides corporate governance, corporate policy and strategy. It also includes corporate security Exhibit 3, application, paragraph 9. Exhibit 3, application, paragraph 12. AUC Decision (March 21, 2013) 7

12 which covers all facets of corporate security, including employee security and the physical security of facilities. The cost centre also captures real estate management services. The supplies portion of the cost centre includes special projects and the use of the corporate aircraft by the corporate office. 28. The E&Y report indicated that E&Y had discussions with members of the executive team as well as the operational and financial leaders of the ATCO Utilities. E&Y s finding regarding this area is as follows: 9.6 Based on our review and analysis of the detailed activities set out on Appendix D, our discussions with ATCO personnel, and our experience as business analysts and business valuators, we did not find any elements of the services performed by the executive team, the corporate security department and the real estate management department that would not be required for the performance of utility functions. 23 Corporate office rent 29. The corporate office rent cost centre consists of the rent paid for the use of the corporate office at th Avenue S.W. in Calgary and th Street NW in Edmonton. E&Y s findings in this area are as follows: 9.8 The employees of the corporate office need office space to operate effectively. 9.9 Based on our review and our experience as business analysts and business valuators, we did not find any elements of Corporate office office rent that would not be required for the performance of utility functions. 24 Finance and controller 30. This cost centre includes financial reporting, tax and treasury activities. The E&Y report indicated that E&Y had discussions with personnel who work in this area as well as the financial leaders of the ATCO Utilities. E&Y s findings in this area are as follows: 9.14 Based on our experience in assessing businesses and other organizations, a finance group needs to supply information to the executive team and other managers to make business decisions. Effectively functioning finance and accounting groups need to produce accurate financial information, which is critical to effective business operations. In order to raise or borrow capital, a company needs reliable financial statements. have significant infrastructure which must be financed Based on our review and analysis of the detailed activities set out on Appendix D, our discussions with ATCO personnel, and our experience as business analysts and business valuators, we did not find any elements of the services performed by the finance and accounting departments that would not be required for the performance of utility functions Exhibit 3, application, Ernst & Young Report, paragraph 9.6. Exhibit 3, application, Ernst & Young Report, paragraphs 9.8 and 9.9. Exhibit 3, application, Ernst & Young Report, paragraphs 9.14 and AUC Decision (March 21, 2013)

13 Internal audit 31. This department provides operational and financial audits of all the ATCO Ltd. group of companies. The E&Y report indicated that E&Y had discussions about this department with the operational and financial leaders of the ATCO Utilities. E&Y s findings in this area are as follows: Insurance 9.18 Based on our experience, a robust internal audit function is a standard component of organizations over a certain size. Regular internal audits are necessary to continually review processes and activities which pose the highest risk to ATCO for financial or business loss. This oversight function also assists in realizing the potential economies of scale of a conglomerate Based on our review and analysis of the detailed activities set out on Appendix D, our discussions with ATCO personnel, and our experience as business analysts and business valuators, we did not find any elements of the services performed by the internal audit accounting department that would not be required for the performance of utility functions The insurance group consists of individuals that manage the insurance umbrella programs. The E&Y report indicated that E&Y had discussions with personnel familiar with the insurance function as well as the operational and financial leaders of the ATCO Utilities. E&Y s findings in this area are as follows: 9.23 Based on our experience, insurance is a necessary function for all organizations, particularly those with large capital investments such as the ATCO Utilities. The purchase of external insurance is a standard corporate policy to mitigate risk. The rapid repair of damage to property contributes to reliable service Based on our review and analysis of the detailed activities set out on Appendix D, our discussions with ATCO personnel, and our experience as business analysts and business valuators, we did not find any elements of the services performed by the insurance department that would not be required for the performance of utility functions. 27 Information technology 33. This area provides holistic planning and strategy to the ATCO Ltd. group of companies for enterprise-wide applications and processes. The E&Y report indicated that E&Y had discussions with personnel familiar with the information technology function as well as the operational and financial leaders of the ATCO Utilities. E&Y s findings in this area are as follows: 9.27 Based on our experience, the use of information technology is necessary to store, manipulate, distribute and process information efficiently. IT provides a mechanism for better communication, research, and higher efficiency. A common IT strategy across ATCO results in higher efficiency and lower costs of Exhibit 3, application, Ernst & Young Report, paragraphs 9.18 and Exhibit 3, application, Ernst & Young Report, paragraphs 9.23 and AUC Decision (March 21, 2013) 9

14 implementation. The more robust the computer service, the lower the chance of an outage which could disrupt service Based on our review and analysis of the detailed activities set out on Appendix D, our discussions with ATCO personnel, and our experience as business analysts and business valuators, we did not find any elements of the services performed by the IT department that would not be required for the performance of utility functions. 28 Corporate secretary 34. The corporate secretary function includes organizing board events and preparing the official record of board meetings including minutes and resolutions. The corporate secretary also maintains corporate documents and records for both public and private companies in the ATCO Ltd. group of companies and manages the use of corporate aircraft. The costs related to the board of directors and general corporate maintenance (e.g. directors fees, filing fees) are captured in corporate secretary costs. 35. The E&Y report indicated that E&Y had discussions with corporate office personnel as well as the operational and financial leaders of the ATCO Utilities. E&Y s findings in this area are as follows: 9.38 Based on our experience, the corporate secretary is a necessary component of a large conglomerate corporation. The capital needs of ATCO Utilities trigger a need for access to the public markets, which in turn require the formal governance structure and documentation which the Corporate Secretary department manages and administers Based on our review and analysis of the detailed activities set out on Appendix D, our discussions with ATCO personnel, and our experience as business analysts and business valuators, we did not find any elements of the services performed by the Corporate Secretary department that would not be required for the performance of utility functions. 29 Human resources 36. This group focuses on three principal areas of service to the ATCO Ltd. group of companies. These areas are organizational development and human resources services, compensation, and pension and benefits. The E&Y report indicated that E&Y had discussions with personnel who work in this area as well as the operational and financial leaders of the ATCO Utilities. E&Y s findings in this area are as follows: 9.34 Based on our experience, managing employees is a critical function for any organization. There are advantages to centralizing these functions in the form of common platforms to pay, develop and evaluate staff. This should result in lower administration costs, increased opportunities for staff, higher staff retention, and more efficient recruiting Based on our review and analysis of the detailed activities set out on Appendix D, our discussions with ATCO personnel, and our experience as business analysts and Exhibit 3, application, Ernst & Young Report, paragraphs 9.27 and Exhibit 3, application, Ernst & Young Report, paragraphs 9.38 and AUC Decision (March 21, 2013)

15 business valuators, we did not find any elements of the services performed by the Corporate Office HR department that would not be required for the performance of utility functions. 30 Corporate communications 37. This department provides internal and external communications services, creative services, and website content; and manages community investment initiatives and special events. The E&Y report indicated that E&Y had discussions with corporate office personnel as well as the operational and financial leaders of the ATCO Utilities. E&Y s findings in this area are as follows: 9.42 Based on our experience and understanding of the particular case of ATCO, the corporate communications functions are primarily for the benefit of the whole company Based on our review and analysis of the detailed activities set out on Appendix D, our discussions with ATCO personnel, and our experience as business analysts and business valuators, we did not find any elements of the services performed by the corporate communications department that would not be required for the performance of utility functions We understand that the corporate communications cost centre includes the cost of political and charitable donations, sponsorships of Spruce Meadows and certain special projects relating to the Vancouver Olympics and the Arctic winter games. We understand that ATCO does not submit these costs to the AUC for rate setting purposes. 31 Issues raised by the UCA regarding the necessity of corporate office services 38. The UCA submitted the following recommendation with respect to the necessity of corporate office services: 47 Based on the evidence on the record, the UCA recommends: Costs that are not required [sic] to provide safe reliable service be excluded from the costs to be allocated to customers. These include: o The management of the community relations function; o The strategy conference in Australia o Direct Energy Regulated Services o Security for the Changing Fortunes Round Table o International Travel Program o Country Risk Assessment o Reputation Management o Brand Management o Organizing Company wide Functions Exhibit 3, application, Ernst & Young Report, paragraphs 9.34 and Exhibit 3, application, Ernst & Young Report, paragraphs 9.42, 9.43 and Exhibit 35.02, argument of the UCA, paragraph 47. AUC Decision (March 21, 2013) 11

16 39. submitted that the costs associated with the various activities within each corporate service area are not tracked separately. stated that it is important to recognize the give and take 33 associated with allocating costs using a formula. The ATCO Utilities added that it would be unfair to remove a portion of sub-level costs for a specific activity because it is incorrectly perceived that the activity is mainly attributed to the nonregulated subsidiaries, while continuing to fully allocate remaining sub-level costs in accordance with the approved formula for activities that are primarily directed towards regulated subsidiaries. Corporate communications: management of the community relations function 40. The UCA argued that there are costs included in the amounts allocated to the ATCO Utilities that are not required to provide safe and reliable utility service, and that customers have been harmed by the inclusion of these costs. The UCA stated that the AUC has already determined that political and charitable donations, sponsorship of Spruce Meadows, and special projects such as the Vancouver Olympics are not required to provide utility service. The UCA added that, if the costs of community involvement have already been excluded as not being required to provide utility service, then the cost of managing such community involvement is not required to provide utility service. 41. The UCA included the following quote from paragraph 407 of Decision to note that the Commission has recently confirmed its position that customer communications and brand development costs should not be included in customer rates. In its evidence the UCA made reference to a number of prior Commission decisions including Decision , Decision and Decision that address the issue of customer communications and brand development. Each of these decisions denies costs related to the types of activities identified by EDTI as included in community relations and the EPCOR community essentials council services. The Commission acknowledges that EDTI has removed certain costs such as donations from these costs but finds that the remaining costs are not required for the provision of utility service and directs EDTI to remove these costs from the 2012 forecast corporate services costs allocated to EDTI and EEAI. (footnotes removed) 42. ATCO Ltd. excluded certain costs from the 2012 total costs to be allocated. These costs are detailed in the response to information request AUC-AU-18(a). 35 These excluded costs include the following: political donations (under the corporate secretary function); charitable donations (under the corporate communications function); and sponsorships (under the corporate communications function). As clarified in the response to information request AUC-AU-18(f), E&Y considers that the excluded costs should be included in the total costs to be allocated. 43. stated that even though they have followed the AUC s rulings with regards to these costs, this does not mean that they have been imprudent or unreasonable or that they are not required for utility service. submitted that donations and sponsorships represent normal organizational expenses that all companies incur for valid business purposes Exhibit 36.01, argument of the ATCO Utilities, paragraph 17. Decision : EPCOR Distribution & Transmission Inc., 2012 Phase I and II Distribution Tariff, 2012 Transmission Facility Owner Tariff, Application No , Proceeding ID No. 1596, October 5, Exhibit AUC Decision (March 21, 2013)

17 44. indicated that E&Y determined that costs associated with coordinating community involvement are indeed incurred by most corporations and are a normal practice. added that the ability to complete required utility work in a timely and efficient manner is dependent on building relationships with communities and if a community is not onside with utility projects there can be unwarranted delays and resulting higher costs to utility customers to facilitate the provision of safe and reliable service. The ATCO Utilities stated that the benefits from positive community relations far outweigh the costs being incurred. indicated that the decision on whether to apply for cost recovery is independent of the determination of necessity and that there are no similar costs involved in the corporate costs under review in this proceeding, as is evident from the detailed analysis in Appendix D of the E&Y report. Commission findings 45. In assessing the total corporate costs included in the application, the Commission is guided by the relevant legislation. Specifically, the Commission s determinations on the total corporate costs must result in rates and a tariff that are just and reasonable. In order to ensure this the Commission will consider whether the applied-for costs are necessary to provide utility service. 46. E&Y considers that the corporate costs previously disallowed by the Commission should be included in the total costs to be allocated to the ATCO Utilities, as described in paragraph 42 above. The Commission disagrees. The Commission finds that E&Y did not provide any compelling evidence that would persuade the Commission to change its previous determinations regarding corporate costs that have been excluded from the revenue requirements of the ATCO Utilities. The parameters that E&Y used to assess whether costs should be included or excluded are not necessarily the same as those of the Commission despite the fact that E&Y submitted it reviewed AUC and other Canadian regulatory decisions on the issue of whether services were required for the performance of utility functions. Specifically, the Commission considers the E&Y report to be somewhat limited by the fact that although certain costs were previously excluded by the Commission, E&Y now proposes that these costs be included. 47. Revenue for the ATCO Utilities is generated through the provision of service at rates which are approved by the Commission. Revenue for most unregulated companies is generated through the provision of service at rates which are set by the management of the company and governed by market forces. The management of these corporations has to determine whether to incur additional costs of items such as political and charitable donations and community sponsorships and still remain competitive. In other words, customers can decide whether they are prepared to pay the prices set by the company, or seek alternatives. However, the customers of the ATCO Utilities do not have other alternatives, and would be forced to bear the cost of items such as political and charitable donations and community sponsorships through the rates they pay for services. The Commission continues to find that these types of costs are not required for the ATCO Utilities to provide utility service to their customers and the ATCO Utilities were correct in excluding such costs from the application. 48. The Commission agrees with the reasoning of the UCA that, if the costs of community involvement are excluded from the total corporate costs to be allocated, then the costs of managing such community involvement should also be excluded. As described in paragraph 44 above, the ATCO Utilities stated that the costs of managing community involvement are not AUC Decision (March 21, 2013) 13

18 included in the total costs to be allocated. In reviewing the response to information request AUC-AU-18(a), it is not evident to the Commission that the costs of managing community involvement have been excluded from the application. The Commission finds that any and all costs associated with community involvement should be excluded from the total corporate costs to be allocated to the ATCO Utilities. This is consistent with a previous Commission finding with respect to EPCOR Distribution and Transmission Inc. in paragraph 407 of Decision , as quoted in paragraph 41 above. 49. The Commission directs the ATCO Utilities, in the compliance filing pursuant to this decision, to exclude any and all costs that relate to community involvement, including the management of this function, that are included in the $45.3 million total requested forecast corporate costs for The Commission further directs the ATCO Utilities to provide a detailed breakdown of the remaining total forecast corporate costs for 2012 included in the corporate communications function which demonstrates that there are no costs included for community involvement. This detailed breakdown should be included as part of the compliance filing pursuant to this decision. 50. In connection with the corporate communications function, the Commission has also reviewed the items included in corporate advertising costs and is not persuaded that these costs are necessary for the provision of utility service. 36 This is consistent with the Commission s finding in paragraph 780 of Decision on the ATCO Gas Phase I General Rate Application. The Commission directs the ATCO Utilities, in the compliance filing pursuant to this decision, to exclude any and all costs that relate to corporate advertising that are included in the $45.3 million total requested forecast corporate costs for Strategy conference in Australia 51. The UCA submitted that the cost of having a strategy conference in Australia is not a cost that is required in a stand-alone utility. In his evidence, Mr. Bell stated that, while strategy conferences may be a normal function of a utility management, a utility with its service territory entirely in Alberta would not have customers pay for a strategy conference in Australia. 52. indicated that the benefits of attending the annual strategy conferences was addressed in the responses to information requests AUC-AU and AUC-AU stated that matters addressed at these strategy conferences include overall strategies for growth, operationally and financially, as well as key governance matters like director education and current policies and practices. added that, of particular importance to them, is the consideration of issues relating to financial risk management and financing strategy to accommodate their significant capital requirement. The ATCO Utilities submitted that even though ATCO Ltd. has worldwide operations, it has held its strategy conferences primarily in Alberta over the last 10 years and will do so again in The ATCO Utilities stated that it would be inefficient for the ATCO Utilities to not attend the annual strategy sessions because of location. indicated that all companies in the ATCO Ltd. group of companies share in the costs and benefits of these annual strategy conferences Exhibit 17.01, response to AUC-AU-18(b). Exhibit Exhibit AUC Decision (March 21, 2013)

19 Commission findings 53. The Commission considers that while strategy conferences are an important tool for an organization, and there are benefits from having these, the additional costs incurred for holding the strategy conference in Australia are not required. The Commission finds that the prudent way to minimize costs for the annual strategy conference would be to hold it in a location that is close to the centre of the operations for the majority of the ATCO Ltd. companies, which is Alberta. The Commission considers that it would be more reasonable for employees based outside Alberta to travel to Alberta to attend the annual strategy conference rather than the opposite because this reduces the number of persons who would be travelling great distances and consequently the associated costs. In the case of the strategy conference for 2012, the ATCO Utilities have indicated that there were additional costs involved as a result of this taking place in Australia, as evidenced in the response to information request AUC-AU-10(a). 39 The Commission directs the ATCO Utilities, in the compliance filing pursuant to this decision, to exclude any and all costs that relate to holding the annual strategy conference in Australia rather than Alberta that are included in the $45.3 million total requested forecast corporate costs for Corporate office security: Direct Energy Regulated Services 54. The UCA argued that, as indicated by Mr. Bell in his evidence, costs related to Direct Energy Regulated Services (DERS) are not required to provide utility service. Mr. Bell, in his evidence, indicated that the E&Y report included the heading of Regulated Services (DERS) as an item under Corporate Asset Security. Mr. Bell added that customers already pay for costs related to the management of DERS in the DERS rates and there is no need for additional costs related to oversight of DERS by ATCO Ltd. in the ATCO Utilities customer rates. 55. countered that DERS, through its call centre, has contact with customers being served by the ATCO Utilities. added that as part of performing these regulated functions, DERS may be apprised of situations that require action by ATCO Ltd. s security such as threats to the employees or infrastructure of the ATCO Group. Commission findings 56. There are calls that are received by DERS regarding potential threats to the employees or infrastructure of ATCO Electric Ltd. and ATCO Gas, as evidenced in the response to information request UCA-AU The Commission considers that it is expected that DERS would receive such calls, because DERS, being the retail service provider for the majority of the customers served by ATCO Electric Ltd. and ATCO Gas, is the first point of contact for these customers. It is also reasonable that upon receiving such calls DERS would contact the appropriate personnel at ATCO Electric Ltd. and ATCO Gas to advise them of these potential threats. The Commission considers that it is a sound utility business practice for the corporate office security area to investigate and act upon such potential threats. However, it is not evident whether the corporate office security area also investigates and acts upon potential threats to the employees or infrastructure of DERS. The Commission finds that any costs incurred by the corporate office security area that relate to potential threats to the employees or infrastructure Exhibit Exhibit AUC Decision (March 21, 2013) 15

20 of DERS should be tracked separately and recovered directly from DERS, and should not be included in the total forecast corporate costs that are allocated to the ATCO Utilities. 57. To clarify this finding, the Commission directs the ATCO Utilities, in the compliance filing pursuant to this decision, to exclude any and all costs that relate to the corporate office security area investigating and acting upon potential threats to the employees or infrastructure of DERS that are included in the $45.3 million total requested forecast corporate costs for Corporate office security: security for the changing fortunes round table 58. In response to information request AUC-UCA-1, 41 the UCA indicated that the costs related to security for the changing fortunes round table are not needed for a stand-alone utility. 59. countered that security for the changing fortunes round table provides benefits to the ATCO Utilities that exceed the small cost involved. added that this function draws on the experience and expert knowledge of some of the highest profile business and government leaders to discuss economic and business related issues. The ATCO Utilities added that this is vital to them as they proceed to deliver on an unprecedented level of infrastructure required to provide safe and reliable service to utility customers. Commission findings 60. The Commission considers that it is not only the costs associated with security for the changing fortunes round table event that are at issue in this case, but also the costs associated with the entire event itself. The Commission finds that the ATCO Utilities have not sufficiently explained why the changing fortunes round table event is required for the provision of utility service. stated that a discussion of economic and business related issues involving high profile business and government leaders is vital to them. The Commission finds that the ATCO Utilities have not sufficiently explained the connection between what is discussed at this event and how it is incorporated into providing safe and reliable service to their customers. 61. The Commission finds that the costs associated with the changing fortunes round table function are not required for the ATCO Utilities to provide utility service. The Commission directs the ATCO Utilities, in the compliance filing pursuant to this decision, to exclude any and all costs that relate to the changing fortunes round table event that are included in the $45.3 million total requested forecast corporate costs for Corporate office security: international travel program 62. In response to information request AUC-UCA-1, the UCA indicated that the costs related to the international travel program are not needed for a stand-alone utility. 63. stated that the international travel program is a low cost way for the ATCO Utilities to arrange business travel to primarily North American locations, and that the ATCO Utilities receive a direct benefit from the synergy and efficiencies that are created. 41 Exhibit AUC Decision (March 21, 2013)

21 Commission findings 64. The Commission considers that international travel may sometimes be required for corporate office personnel or personnel from the ATCO Utilities in the performance of the utility function, because the ATCO Utilities do source products from other countries. However, the ATCO Utilities have failed to explain why a corporate security feature is necessary for this international travel program, especially when the ATCO Utilities stated that the majority of the business travel is to primarily North American locations, which do not present a high risk. The costs associated with the corporate security function area of the international travel program are not evident. The Commission finds that it would be reasonable to determine what the magnitude of these costs are and assess whether it is more economical for ATCO Ltd. to purchase security on an individual international trip basis as opposed to providing the service itself. The Commission directs the ATCO Utilities, in the compliance filing pursuant to this decision, to provide details about the corporate security costs for the international travel program that are included in the $45.3 million total requested forecast corporate costs for Such details should include whether the costs are forecast on an across-the-board flat basis or a per trip basis. If the corporate security costs for the international travel program are forecast on a per trip basis, the ATCO Utilities should provide the number of trips forecast, and the destinations. The Commission also directs the ATCO Utilities, as part of the compliance filing pursuant to this decision, to submit cost estimates for purchasing security for international travel from a third party vendor. Corporate office security: country risk assessment 65. In response to information request AUC-UCA-1, the UCA indicated that the costs related to country risk assessment are not needed for a stand-alone utility. 66. stated that country risk assessment is required because they source key products from foreign-based suppliers and any negative business practices or possible disruption to supplies must be known. Commission findings 67. The Commission agrees with the ATCO Utilities that any negative business practices or possible disruption to supplies must be determined when the ATCO Utilities are sourcing key products from foreign-based suppliers. The Commission considers that this is a sound business practice and is required for the operation of any utility that procures products from foreign-based suppliers. Consequently, the Commission finds that the prudent costs associated with such an activity should be included in the total forecast corporate costs. The Commission therefore rejects the submission of the UCA that these costs be excluded. Corporate communications: reputation management and brand management 68. In response to information request AUC-UCA-1, the UCA indicated that the costs related to reputation management and brand management are not needed for a stand-alone utility. 69. stated that reputation management and brand management in the often controversial environment regarding major utility projects provides the ATCO Utilities a benefit in pursuing project support from stakeholders. AUC Decision (March 21, 2013) 17