FortisAlberta Inc. Sale and Transfer of the Municipality of Crowsnest Pass Electric Distribution Assets

Transcription

1 Decision D Sale and Transfer of the Electric Distribution Assets June 5, 2018

2 Alberta Utilities Commission Decision D Sale and Transfer of the Electric Distribution System Assets Application A001 Application A002 Proceeding June 5, 2018 Published by the: Alberta Utilities Commission Eau Claire Tower, 1400, 600 Third Avenue S.W. Calgary, Alberta T2P 0G5 Telephone: Fax: Website:

3 Contents 1 Decision summary Introduction and background Discussion Commission findings Stage one: public interest Change in FortisAlberta s roles and responsibilities Stage two: Prudence of the purchase price Introduction on rate implications Method for calculating the purchase price Depreciation Other adjustments Summary Appendix A - Proceeding participants... 15

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5 Alberta Utilities Commission Calgary, Alberta Sale and Transfer of the Electric Distribution Assets Decision D Application for Permission to Cease and Proceeding Discontinue Operations Applications A001 and A002 1 Decision summary 1. In this decision, the Alberta Utilities Commission must decide whether to approve applications by (FortisAlberta) and the (Municipality) for the sale and transfer of the municipality s electric distribution system and related assets under the terms specified in the asset purchase agreement. 1 In addition, and at the request of FortisAlberta, the Commission also will consider the reasonability, calculation and prudence of the purchase price of $3,745, After consideration of the record of the proceeding, and for the reasons outlined in this decision, the Commission finds that approval of the sale and transfer of the municipality s electric distribution system and related assets is in the public interest. However, the Commission is not persuaded that the depreciation component of the purchase price represents a valid estimate of the electric distribution system assets and, accordingly, does not consider the purchase price amount of $3,745,902 to be prudent. 2 Introduction and background 3. On July 5, 2016, the Municipality applied to the Commission for approval to cease and discontinue the operation of its electric distribution system on the basis that the assets are to be sold and transferred to FortisAlberta in accordance with the terms of the asset purchase agreement, and pursuant to sections 25, 29 and 30 of the Hydro and Electric Energy Act. The Municipality s application was registered as Application A Also, on July 5, 2016, FortisAlberta filed an application with the Commission requesting approval of the sale of assets for the purchase price of $3,745,902 and transfer of the Municipality s electric distribution service area to FortisAlberta, pursuant to sections 25, 29 and 30 of the Hydro and Electric Energy Act. FortisAlberta s application was registered as Application A001. FortisAlberta also requested an assessment of the prudence of the purchase price FortisAlberta and the Municipality requested that the Commission consider the applications jointly; therefore, the Commission combined the consideration of the applications into Proceeding Exhibit X0007, Crowsnest Pass Service Area Transfer Application. 2 Exhibit X0041, FAI-AUC-2016NOV08-001_0043(a). Decision D (June 5, 2018) 1

6 Sale and Transfer of the Electric Distribution Assets 6. On July 27, 2016, the Commission issued a notice of applications for Proceeding 21785, with a deadline of August 17, 2016, for submissions to express objections, concerns, or support for one or more of the applications. The notice was published on the AUC website and notification was automatically ed to efiling System users who had chosen to be notified of notices of application issued by the Commission. 7. No submissions were received by the submission deadline of August 17, On July 28, 2016, the Commission issued information requests (IRs) to both FortisAlberta and the Municipality to clarify details of the applications. Both FortisAlberta and the Municipality submitted responses on August 11, On August 30, 2016, the Commission issued a second round of IRs to FortisAlberta to clarify details of the payment of compensation to the Municipality. FortisAlberta submitted its responses on September 20, On November 8, 2016, the Commission issued a third round of IRs to FortisAlberta to clarify details of the prudence of the purchase price of the Municipality s electrical distribution system assets. FortisAlberta submitted its responses on November 8, On November 16, 2016, the Commission issued a notice of review of the prudence of the purchase price for the sale of the Municipality s electric distribution system assets, with a written submission deadline of November 30, The notice was issued to inform parties that the Commission s rate making function, as well its function to issue facility approvals for the purchase and sale of the Municipality s electric distribution system, were engaged in this proceeding. 12. No submissions were received. 13. On December 16, 2016, the Commission issued a letter to FortisAlberta and the Municipality informing them that the Commission would suspend its consideration of Proceeding until it issued a decision on Proceeding due to the similarity of the issues raised in each proceeding. 14. On October 3, 2017, the Commission issued Decision D with respect to Proceeding The Commission re-commenced its consideration of Proceeding and allowed interested parties an opportunity to file a statement of intent to participate (SIP) by November 10, No SIPs were received by the Commission. 15. The Commission considers the record of this proceeding to have closed with the submission of argument from FortisAlberta and the Municipality on March 6, 2018 and March 7, 2018, respectively. 16. In reaching the determinations set out within this decision, the Commission has considered all relevant materials comprising the record of this proceeding. Accordingly, references in this decision to specific parts of the record are intended to assist the reader in 3 Decision D : Office of the Utilities Consumer Advocate, Commission-Initiated Review and Variance of Decision D and Decision D , Proceeding 21768, October 3, Decision D (June 5, 2018)

7 Sale and Transfer of the Electric Distribution Assets 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 a particular matter. 3 Discussion 17. The Municipality operates an electric distribution system in its service area within its boundaries. The operation of the electric distribution system within this service area was approved previously by the Energy Resources Conservation Board in Approval HE At that time, the three municipality-owned service area regions corresponding to the former towns of Coleman and Blairmore and the village of Frank were amalgamated into the Municipality. 18. FortisAlberta entered into a municipal franchise agreement with the Municipality, whereby FortisAlberta provides electric distribution service to the majority of the residents within the Municipality. FortisAlberta also has an adjacent service area situated within the Municipality s boundaries The Municipality indicated that by virtue of the contiguous nature of the Crowsnest Pass and FortisAlberta service areas within the municipal boundaries, and to support the exclusive nature of the municipal franchise agreement with FortisAlberta, it requested that FortisAlberta provide a formal offer to purchase the electric distribution system assets of the Municipality. The Municipality indicated that the sale and transfer would harmonize the provision of electric distribution service for all customers within the boundaries of the Municipality. 20. In its application, FortisAlberta also submitted that the transfer would secure the services of a stable and reliable long-term supplier of electric distribution service to the benefit of all customers within the community. FortisAlberta added that along with the majority of customers it already serves, it would provide continuity of service to the customers previously served by the Municipality and would operate, maintain, replace, reconstruct, alter or upgrade the facilities in accordance with the municipal franchise agreement. 21. FortisAlberta and the Municipality stated that the finalization of the transfer of the Municipality s assets was to occur on or before November 1, FortisAlberta indicated that the requested service area land is approximately 3.7 square kilometres and the Municipality s assets to be sold to FortisAlberta are composed of typical distribution assets such as poles, overhead and underground conductor, transformers and street lights. 23. FortisAlberta stated that there are approximately 1,530 residential and general service customers, as well as municipal street lights, which, once transferred to FortisAlberta, would be subject to FortisAlberta s Distribution Tariff and the corresponding rates based on the applicable service and load characteristics for each point of service. 4 Approval HE 8705, Application , June 18, Approximately 60 per cent as per Exhibit X0011, Service Area Transfer Application, paragraph 3. Decision D (June 5, 2018) 3

8 Sale and Transfer of the Electric Distribution Assets 24. The Municipality stated it instituted a community consultation process related to the potential sale. The Municipality stated it notified residents through direct mail, billboards, radio advertisements, printed advertisements in the Crowsnest Pass Herald, and by posting a news release on its website. It also held two open houses to consult with the Municipal community. 25. The Municipality indicated that after undertaking the public notification process, the council of the Municipality, at a regular meeting held on April 19, 2016, unanimously passed a resolution to proceed with the sale of the Municipality s electric distribution system assets to FortisAlberta for a purchase price of $3,745,902. The Municipality stated that this offer amount reflects the valuation method of replacement cost new, less depreciation, which it claimed to be consistent with compensation for service area alterations contemplated in Subsection 29(4) of the Hydro and Electric Energy Act. The asset purchase agreement between the Municipality and FortisAlberta is dated June 27, Commission findings 26. The Commission will consider the applications in two stages. In stage one, the Commission will consider whether approval of the sale and transfer transaction is in the public interest (facility approval function). In stage two, the Commission will consider whether to approve the prudence of the purchase price (rate making function). 4.1 Stage one: public interest 27. With the approval of the Commission, an electric distribution system may cease operations under Section 29 or discontinue operations under Section 30 of the Hydro and Electric Energy Act. The salient sections are reproduced below: Boundaries 29(1) The Commission, on the application of an interested person or on its own motion, (a) when in its opinion it is in the public interest to do so, and (b) on any notice and proceedings that the Commission considers suitable, may alter the boundaries of the service area of an electric distribution system, or may order that the electric distribution system shall cease to operate in a service area or part of it at a time fixed in the order. (4) When an order made under subsection (1) or (3) reduces the service area of an electric distribution system, the Commission, if it considers such a provision suitable, may make provision in the order for (a) payment of compensation to the owner of the electric distribution system whose service area is reduced, (b) the circumstances and conditions under which, and the time at which, that owner is entitled to receive compensation, 4 Decision D (June 5, 2018)

9 Sale and Transfer of the Electric Distribution Assets (c) the matters in respect of which any compensation is payable, which matters may include (i) any facilities transferred, based on reproduction cost new, less depreciation, [emphasis added] Discontinuance of service 30(1) No holder of an approval under this Part and no person who operated an electric distribution system on June 1, 1971 shall discontinue the operation of the holder s or person s electric distribution system or discontinue the distribution of electric energy in any area, except in a case of emergency or for repairs and maintenance, unless the holder or person has obtained authority in writing from the Commission to do so. (2) The Commission may make any order on an application under this section that it considers just and proper and in the public interest. 28. Provisions in the Hydro and Electric Energy Act also address the sale of distribution utility assets. Municipality-owned distribution utilities usually sell their assets to the electrical utility in whose service area they are located. In making its decision on this application, the Commission is aware of the ongoing need to provide utility service following the sale of municipality-owned assets. 29. The Commission has reviewed the Municipality s application to cease and discontinue its operations and the asset purchase agreement and observes that supporting documentation, such as the resolution and meeting minutes of the council of the Municipality and copies of advertisements placed in the Crowsnest Pass Herald, were included with the application. 30. As stated above, the Municipality has applied to the Commission for permission to cease and discontinue its operations in accordance with sections 29 and 30 of the Hydro and Electric Energy Act. Section 29 allows an electric distribution utility to cease to operate in its service area and Section 30 requires the Commission to determine if it is in the public interest to grant a request by an applicant to discontinue the distribution of electric energy in any area. 31. In consideration of FortisAlberta and the Municipality s applications, the Commission may also make any order that it considers just and proper and in the public interest. 32. In assessing the public interest of the sale and transfer applications, the Commission has considered that FortisAlberta s assets and operations are also located within the Municipality s boundaries. The Commission has also considered and relied upon the agreement of FortisAlberta to continue to provide service to the customers served by the Municipality and to operate, maintain, replace, reconstruct, alter or upgrade the facilities in accordance with the municipal franchise agreement. Further, the Commission observes that the Municipality requested FortisAlberta to make a formal offer and that the council of the Municipality has passed a resolution unanimously to proceed with the sale of its electric distribution system and related assets to FortisAlberta. 33. For the above reasons, the Commission finds that the transfer of the Municipality s electric distribution system and related assets to FortisAlberta is in the public interest. Decision D (June 5, 2018) 5

10 Sale and Transfer of the Electric Distribution Assets 34. Based on the foregoing, the Commission finds that it is in the public interest to grant the Municipality s application to cease to operate in its service area and discontinue operations of its electric distribution system, pursuant to sections 29 and 30 of the Hydro and Electric Energy Act, provided that the facilities are transferred to, and operated by, FortisAlberta pursuant to the terms of the asset purchase agreement Change in FortisAlberta s roles and responsibilities 35. In approving the applications, the Commission understands that the sale of the assets that comprise the electric distribution system from the Municipality to FortisAlberta would result in a change in roles and responsibilities related to the load settlement agent (LSA), meter data manager (MDM) and wire service provider (WSP) functions. 6 Presently, these functions are being performed by ENMAX Power Corporation (EPC) on behalf of the Municipality. Given the evidence on the record, the Commission understands that FortisAlberta, as the new electric distribution owner of the assets in transfer, would be responsible for providing these services. There is no indication on the record that EPC will be contracted to provide these services on behalf of FortisAlberta. In the Commission s view, it is imperative that EPC and FortisAlberta co-operate during the transition of these roles and responsibilities to ensure the effective functioning of the distribution system. 36. The entity providing the regulated service will also change after the sale is completed. Currently, EPC provides the regulated service under a regulated rate tariff. The Commission understands that EPCOR Energy Alberta GP Inc., as the regulated service provider in the FortisAlberta service area, will assume this responsibility. 37. Section 2.18 of Rule 021: Settlement System Code Rules states the following: Any market participant who proposes to cause a change to the party performing the role and responsibilities of an LSA/MDM/WSP must provide written notice to each market participant that may be affected by the change. The written notice must be provided at least 90 calendar days prior to the date that the change is to take place. In addition to the written notice, both the current LSA/MDM/WSP and the new LSA/MDM/WSP designate must jointly submit a transition plan to both the AUC and to the ISO at least 60 calendar days prior to the effective date of the change Rule 021 requires EPC and FortisAlberta to co-ordinate their activities to ensure the transition of responsibilities occurs with minimal disruption to the retailers customer enrollment and billing processes, the load settlement process and to the provision of service to customers. This co-ordination will involve the sharing of customer information between EPC and FortisAlberta as well as the sharing of information pertaining to regulated rate customers between FortisAlberta and EPCOR Energy Alberta GP Inc. This sharing of customer information is imperative to ensure customers are informed about, and prepared for, the change in responsibilities. The Commission expects all parties to conform strictly to the requirements of Rule 021 and expects that the customer information will be used solely for the purpose of transitioning the Rule 021 responsibilities related to the Municipality s distribution service area to FortisAlberta. 6 These functions are defined and described in Rule 021: Settlement System Code Rules. 6 Decision D (June 5, 2018)

11 Sale and Transfer of the Electric Distribution Assets 4.2 Stage two: Prudence of the purchase price 39. In its stage one assessment, the Commission has not made any findings on the prudence of the purchase price to be paid by FortisAlberta to the Municipality. The Commission will consider this issue in this section of the decision Introduction on rate implications 40. Under the Electric Utilities Act, the Commission must establish rates that provide the distribution utility with a reasonable opportunity to recover its prudent costs to provide service to its customers. 41. The Supreme Court of Canada has stated the following regarding prudence in relation to the Electric Utilities Act: However, these dictionary definitions are not so consistent and exhaustive as to provide a complete answer to the question of the meaning of prudent costs in the context of the Alberta utilities regulation statutes. As such, a contextual reading of the statutory provisions at issue provides further guidance. In the context of utilities regulation, I do not find any difference between the ordinary meaning of a prudent cost and a cost that could be said to be reasonable. It would not be imprudent to incur a reasonable cost, nor would it be prudent to incur an unreasonable cost The Commission regulates distribution utilities under a performance-based regulation (PBR) framework. On December 16, 2016, the Commission issued Decision D (Errata, issued February 6, 2017): Performance-Based Regulation Plans for Alberta Electric and Gas Distribution Utilities (the PBR decision). 8 The PBR decision approved PBR plans for five distribution companies, for a five-year term commencing January 1, PBR replaces traditional cost-of-service regulation as the annual rate-setting mechanism for utility rates. The PBR framework provides a formula mechanism for the annual adjustment of rates independent of the underlying costs incurred by the companies. In general, the companies going-in rates are adjusted annually by means of an indexing mechanism that tracks the rate of inflation relevant to the prices of inputs the companies use, less an offset to reflect the productivity improvements the companies can be expected to achieve during the PBR plan period. There are certain adjustments that distribution companies can apply for that provide treatment for certain costs not accounted for within the context of the indexing mechanism. 43. Once the Commission has determined the cost of an electric distribution system acquisition to be prudent, the distribution utility may apply to the Commission for an adjustment of its rates. 44. As stated above, FortisAlberta also requested that the Commission assess the prudence of the purchase price. If the Commission were to find the purchase price to be prudent, then this would facilitate FortisAlberta s application for purchase price recovery in rates as part of the annual PBR rate adjustment filing SCC 45 at paragraph Decision D : Performance-Based Regulation Plans for Alberta Electric and Gas Distribution Utilities, Proceeding 20414, December 16, Errata issued on February 6, Decision D (June 5, 2018) 7

12 Sale and Transfer of the Electric Distribution Assets Method for calculating the purchase price 45. FortisAlberta submitted that the purchase price was calculated using the valuation method of replacement cost new, less depreciation, which is consistent with the compensation for service area alterations, reproduction costs new less depreciation contemplated in the Hydro and Electric Energy Act. 46. Since Subsection 29(4) of the Hydro and Electric Energy Act makes reference to reproduction cost new, less depreciation while FortisAlberta makes reference to the use of replacement cost new, less depreciation, the Commission has drawn upon its earlier findings in Decision D Similar to the process for consideration of the valuation methodology in that decision, the Commission has evaluated the two components replacement cost new and depreciation (D), in the circumstances of the current proceeding. 47. FortisAlberta stated that the purchase price was based on obtaining a replacement value in lieu of a reproduction cost that generally consisted of physical survey, assessment and gathering of pertinent information of the Municipality s distribution network, as well as interviews with the Municipality s stakeholders. FortisAlberta argued that the reproduction-based methodology would potentially nullify economies of scale and scope achieved under the replacement-based method, as it would be challenging to determine costs of constructing an older vintage asset using identical materials and to account for production standards, quality of workmanship and asset design layouts of the time. Due to the limited records available for the Municipality s distribution assets, FortisAlberta advised that certain assumptions were required to be made in order to determine a cost estimate for replacement of the distribution facilities. FortisAlberta submitted that the use of replacement-based valuation in system pricing is a reasonable and prudent approach and can be expected to result in conservative pricing. 48. FortisAlberta provided a summary of how the replacement cost new, less depreciation method has been applied and the calculation of the purchase price, which is illustrated in the table below: Table 1. Summary of replacement cost new less depreciation and purchase price calculation 9 Municipally-owned service area region Material, labour and engineering cost Blairmore $2,196,673 Coleman $2,412,189 Frank & Bellevue $798,924 Replacement cost new $5,407,786 Depreciation ($1,640,277) Replacement cost new less depreciation $3,767,508 Adjustments to replacement cost new less Cost depreciation price Less: Cost of Removal -Poles & Meters ($121,086) Add: Other Assets Purchased Radial Boom Digger $40,000 Flat Deck Trailer $7,000 Inventory $52,480 Total Purchase Price $3,745,902 9 The Commission created this table from the evidence including Exhibit X0032, Attachment FAI-AUC-2016JUL Decision D (June 5, 2018)

13 Sale and Transfer of the Electric Distribution Assets 49. FortisAlberta also noted that the purchase price was adjusted for the costs associated with removing certain poles identified for immediate replacement and also the removal of mechanical metering equipment incompatible with FortisAlberta s billing system. In addition, FortisAlberta included in its purchase price the fair market value of specific assets, such as a radial boom digger and flat deck trailer, and an average material price of inventory items in general. 50. In its IRs to FortisAlberta, 10 the Commission inquired about the various assumptions applied by FortisAlberta to calculate the values for the replacement methodology used in the derivation of the final purchase price of $3,745,902. FortisAlberta provided the following explanation in regard to the methodology used: FortisAlberta s calculations of Replacement Cost New (RCN) are premised on the construction of facilities in accordance with current industry standards and good utility practice. Accordingly, the RCN calculation for the electric distribution assets of the (CNP) was determined using FortisAlberta s standard construction practices for new projects using its estimating tool. FortisAlberta did not assume that the replacement cost of the CNP assets would correspond to the installation of a 4.16 kv [the voltage standard of the Municipality s existing system] system for the purpose of completing the RCN calculation. It developed its replacement cost estimate based on a distribution voltage of 25 kv since similar systems are currently constructed to this industry standard. FortisAlberta generated estimates comparing replacement costs for specific components (e.g., transformers) designed to operate at each voltage level and has determined that no incremental cost increase results from the adoption of the 25 kv standard. 11 [emphasis added] 51. In response to the Commission s IR to provide an analysis that would substantiate FortisAlberta s conclusion that there is no incremental cost increase from the adoption of the 25-kilovolt (kv) standard in its calculation, FortisAlberta explained that the three main equipment components that would differ between the Municipality s 4.16-kV overhead distribution system and a 25-kV distribution system were insulators, transformers, and overhead primary conductors. In the table below, FortisAlberta provided unit cost values for each type of equipment that differed between the two voltage standards: Table 2. Equipment unit cost breakdown by system voltage Equipment System Voltage Description Unit Cost ($) Insulator 4.16 kv 15 kv Voltage Class $ kv 25 kv Voltage Class $9.03 Transformer 4.16 kv 2.4 kv Primary Winding, 25 kva $1, kv 14.4 kv Primary Winding, 25 kva $1,128 Overhead Bare Conductor 4.16 kv 25 kv 3/0 ACSR #2 ACSR $1.25/metre $0.59/metre Source: Exhibit X , FAI-AUC-2017NOV24-002(a). 10 Exhibit X0033, AUC Information Request to FortisAlberta - Round Exhibit X0036, FAI-AUC-2016AUG30-001(e). Decision D (June 5, 2018) 9

14 Sale and Transfer of the Electric Distribution Assets 52. FortisAlberta indicated that its conservative approach of adapting to a 25-kV standard, confirms the effects of economies of scope and scale 12 resulting in a lower equipment cost and economical system overall. 53. Further, FortisAlberta stated that since the Municipality s system was first constructed, the electrical industry s safety code standards have been significantly updated, causing the Municipality s system, currently operating at 4.16-kV, to be one of the very few electric distribution systems in North America operating at such a low voltage. FortisAlberta submitted that this system voltage, while functional, is outdated and it should be a high priority to convert it to 25-kV. 54. The Commission agrees with FortisAlberta that it would be a labour-intensive task to determine the vintage of the assets in question, and obtain a reasonable cost estimate had FortisAlberta chosen to use reproduction cost new methodology. Further, in the Commission s view, the evidence on the record of this proceeding is insufficient to support the use of a blended valuation approach, which would combine both the replacement and reproduction cost new methodologies to evaluate the Municipality s assets when compared to the replacement cost new less depreciation methodology. 55. For the above reasons, the Commission accepts that FortisAlberta s use of the replacement cost new less depreciation methodology is reasonable for the purposes of this decision, subject to the findings on the depreciation (D) component calculations discussed in Section As noted previously, given the limited number of detailed records of the Municipality s assets, FortisAlberta could not determine the actual vintage of these assets in its purchase price evaluation. 56. In light of the Commission s acceptance of the replacement cost new less depreciation methodology, the Commission finds, in this instance, that replacing the Municipality s infrastructure, resulting in a replica of the original 4.16-kV system, may result in a higher cost system than an upgrade to a 25-kV system as illustrated in Table 2 above. The Commission also accepts FortisAlberta s argument with respect to the benefits of a higher voltage system infrastructure, such as reliability, power stability, reduction in the amount of line loss, and ease of future system expansion. Accordingly, the Commission considers it is reasonable to account for the upgrades to a 25-kV system in the purchase price. The Commission approves the replacement cost new value of $5,407,786 as reflected in the FortisAlberta proposal. The following section will discuss the Commission s findings of the D component of the replacement cost new less depreciation methodology Depreciation 57. With respect to the D component of the replacement cost new less depreciation methodology FortisAlberta provided the following explanation: FortisAlberta applied a depreciation rate based on the accumulated depreciation of the Company s distribution assets. The rate was calculated using FortisAlberta s actual accumulated depreciation on distribution assets, excluding site restoration and gain/loss, as a percentage of gross book value of distribution assets, based on actuals reported in the 12 Exhibit X , FAI-AUC-2017NOV24-002(a). 10 Decision D (June 5, 2018)

15 Sale and Transfer of the Electric Distribution Assets 2014 Rule 005 Report of Finances and Operations. This method provided a reasonable estimate of accumulated depreciation for the acquired assets in the absence of detailed asset vintages FortisAlberta further clarified that its distribution asset rate base is composed of assets of differing conditions and vintages, which are broadly similar to those of the Municipality. Therefore, FortisAlberta submitted that the use of a ratio of accumulated depreciation to gross book value provides a reasonable proxy of the accumulated depreciation associated with the acquired assets in the absence of detailed, verifiable records. 14 In its application, FortisAlberta relied on the accumulated depreciation rate of per cent that was applied towards the replacement cost new amount of $5,407,786 and resulted in the D component of $1,640, At the request of the council of the Municipality, FortisAlberta prepared a Electric Utility Assessment report (assessment report) in September 2015, including an assessment of the electricity distribution system owned and operated by the Municipality. 16 In that report, FortisAlberta stated that its assessment of the Municipality s electric utility infrastructure was prepared using information obtained from the Municipality s manager of operations, as well as information collected by FortisAlberta through an examination of the distribution facilities by qualified FortisAlberta operations staff and a safety codes officer. FortisAlberta noted that the information gathered was reviewed further by an experienced FortisAlberta asset maintenance engineer. 60. In addition, FortisAlberta identified the following key issues during its system assessment: (i) 35 per cent of the power poles have reached the end of their life, with 70 per cent of remaining poles reaching the end of life within the next 10 years; (ii) a visual inspection determined that transformers were approximately 45 to 55 years old, with the service life of a transformer being typically 50 years; (iii) primary and secondary conductors showed signs of wear with the presence of a number of splices, which are indicative of a typical emergency repair; (iv) while the underground system appeared to be in satisfactory condition, the placement of a number of padmount transformers raised a concern, because such placement results in premature aging of equipment and difficulties with power restoration during an outage; and, (v) street lighting levels were not up to Illuminating Engineering Society of North America standards. 61. In response to the Commission s IR about FortisAlberta s D component calculation, FortisAlberta calculated an accumulated D amount of $3,474,000, that resulted in a replacement cost new less depreciation value of $1,933, However, FortisAlberta was of the opinion that significant caution should be exercised before drawing conclusions from this revised D component. FortisAlberta submitted that in order to complete the calculations requested by the Commission, it had to rely on unsubstantiated assumptions due to the lack of specific and verifiable observations related to asset age. FortisAlberta concluded that there were several limitations inherent in the source information relied upon in the development of the assessment 13 Exhibit X0031, Attachment FAI-AUC-2016JUL Exhibit X , FAI-AUC-2017NOV24-003(a). 15 Exhibit X0032, Attachment FAI-AUC-2016JUL _0032, Tab FortisAlberta assessment report of the electricity distribution system owned and operated by the Municipality, 17 Exhibit X0052, Attachment B, Tab 1. Decision D (June 5, 2018) 11

16 Sale and Transfer of the Electric Distribution Assets report that severely limit the usefulness of the conclusions it contains in a ratemaking environment. Further, FortisAlberta stated that it could not submit or rely on such cursory and incomplete information in its original application and decided to use the per cent proxy value based on FortisAlberta s actual electrical distribution system depreciation. 62. The Commission observes that in the assessment report to the Municipality, FortisAlberta concluded the following upon its inspection of the purchasing assets: Based on FortisAlberta s review, the electric utility system is functional and when the system was constructed, it met the minimum safety code requirements in place at the time. While the system assets met those now grandfathered safety and construction standards, the majority of the system assets have reached or are nearing the end of their service life and they no longer are up to current construction, operating and maintenance standards. Safety code standards have been updated significantly since the electricity system was first constructed. 18 [emphasis added] 63. It is the Commission s understanding that per cent depreciation rate has been applied to assets that have approximately 2/3 of their life remaining. The Commission is concerned with FortisAlberta s chosen methodology of applying per cent towards the Municipality s assets that have reached or are near the end of their service life. The Commission does not agree with FortisAlberta that this method provides a reasonable proxy for estimating the accumulated depreciation associated with the acquired assets. The Commission disagrees that a D component of $1,640,277 produces a value that is commensurate with the value of the Municipality s system. Equally so, the Commission is not convinced that the approach, underlying assumptions, and methodology for obtaining the D component of $3,474,000 is superior to execution of the original depreciation methodology. 64. In light of the above, the Commission has insufficient evidence on the record of this proceeding to determine which approach is suitable to calculate the D component. As such, the Commission is not persuaded that FortisAlberta s application of the per cent depreciation rate, based on accumulated depreciation of FortisAlberta-owned distribution assets, is applicable to the Municipality s assets in light of the vintage of those assets being acquired. 65. Accordingly, FortisAlberta s request for the Commission to find that the accumulated depreciation amount of $1,640,277 employed in the replacement cost new less depreciation methodology to be prudent is denied Other adjustments 66. As shown in Table 1, FortisAlberta adjusted the replacement cost new less depreciation amount for the fair market value of specific assets, such as a radial boom digger and flat deck trailer, an average material price of inventory items in general, as well as the cost of removal of specific poles and meters. The summation of total adjustments resulted in a decrease of $21, The Commission has reviewed FortisAlberta s submissions regarding the adjusted items as shown in Table 1 and considers each adjusted item to be generally reasonable for the purchase 18 FortisAlberta assessment report of the electricity distribution system owned and operated by the Municipality, PDF page 6, 12 Decision D (June 5, 2018)

17 Sale and Transfer of the Electric Distribution Assets of this proceeding. The requested adjustments to the replacement cost new less depreciation price, as shown in Table 1 above, are approved as filed. 5 Summary 68. The Commission has considered the applications in two stages. In stage one, the Commission found the transfer of the Municipality s electric distribution system operations and related assets to FortisAlberta to be in the public interest. Accordingly, the Commission is prepared to: a) approve the application of the Municipality to cease to operate in its service area, pursuant to Section 29(1) of the Hydro and Electric Energy Act b) authorize the Municipality to discontinue its electric distribution system operations under Section 30 of the Hydro and Electric Energy Act c) order the incorporation of the service area of the Municipality into FortisAlberta s service area, pursuant to Section 25 of the Hydro and Electric Energy Act d) rescind Approval HE 8705 concurrent with the closing of the transfer of the electric distribution system and related assets to FortisAlberta 69. In stage two, the Commission assessed the prudence of the purchase price to be paid by FortisAlberta to the Municipality, on the basis that the Commission must establish rates that provide the distribution utility with a reasonable opportunity to recover its prudent costs to provide service to its customers. The Commission made a finding that the use of the replacement cost new less depreciation methodology is reasonable in the circumstances, and also approved the value of the applied-for replacement cost new amount; however, the Commission did not find the applied-for depreciation amount to be prudent. Accordingly, the Commission did not find the applied-for purchase price to be prudent, for rate setting purposes. 70. The transfer of the Municipality s electric distribution system and related assets may proceed irrespective of the Commission s findings with respect to the purchase price agreed to in the asset purchase agreement. However, given FortisAlberta s request that the Commission consider the facility applications and the assessment of the purchase price concurrently in this proceeding, and the Commission s determination that it was not able to make a finding in this decision that the applied-for purchase price was prudent, the Commission places the following condition on the facilities approvals: FortisAlberta and the Municipality shall advise the Commission within 90 days of the date of this decision whether they intend to proceed with the sale and transfer of the electric distribution system and related assets including confirmation of the purchase price to be paid to the Municipality and the effective date of the transfer. If the parties advise that they intend to proceed with the transfer, then the Commission will issue the requisite approvals. If the parties advise that they do not intend to proceed with the transfer, then the Commission will close applications A001 and A002 at that time. 71. For greater clarity regarding the Commission s findings in its stage two assessment, as the Commission has not been able to determine that the applied-for purchase price is prudent, for rate setting purposes, should FortisAlberta pay the Municipality the applied-for purchase price, Decision D (June 5, 2018) 13

18 Sale and Transfer of the Electric Distribution Assets FortisAlberta will be at risk for recovery of the full amount from ratepayers. However, FortisAlberta may reapply to the Commission in a compliance filing to this decision for approval of a revised purchase price determined on the basis of a comprehensive depreciation methodology that reflects the state of condition, vintage and necessity of the infrastructure assets to be acquired from the Municipality. Should the Commission find the revised purchase price to be prudent for rate setting purposes, then FortisAlberta would be free to use this determination in its application for purchase price recovery in rates as part of the annual PBR rate adjustment filing. Dated on June 5, Alberta Utilities Commission (original signed by) Henry van Egteren Commission Member (original signed by) Mark Kolesar Vice Chair 14 Decision D (June 5, 2018)

19 Sale and Transfer of the Electric Distribution Assets Appendix A - Proceeding participants Name of organization Alberta Utilities Commission Commission panel M. Kolesar, Vice-Chair H. van Egteren, Panel Chair Commission staff J. Graham (Commission counsel) S. Sinclair (Commission counsel) K. Elkassem A. Jukov Decision D (June 5, 2018) 15