City of Edmonton. Natural Gas Franchise Agreement with ATCO Gas and Pipelines Ltd. August 31, Decision

Transcription

1 Alberta Energy and Utilities Board Decision Natural Gas Franchise Agreement with ATCO Gas and Pipelines Ltd. August 31, 2004

2 ALBERTA ENERGY AND UTILITIES BOARD Decision : Natural Gas Franchise Agreement with ATCO Gas and Pipelines Ltd. Application No Published by Alberta Energy and Utilities Board Avenue SW Calgary, Alberta T2P 3G4 Telephone: (403) Fax: (403) Web site:

3 Contents 1 INTRODUCTION VIEWS OF THE PARTIES The City ATCO Gas Rate 13 Group CCG VIEWS OF THE BOARD ORDER... 9 APPENDIX 1 PARTIES PARTICIPATING IN THE PROCEEDING EUB Decision (August 31, 2004) i

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5 ALBERTA ENERGY AND UTILITIES BOARD Calgary Alberta CITY OF EDMONTON Decision NATURAL GAS FRANCHISE AGREEMENT WITH Application No ATCO GAS AND PIPELINES LTD. File No E6 1 INTRODUCTION By letter dated January 23, 2004, the (the City) filed an application with the Alberta Energy and Utilities Board (the Board or EUB) requesting approval of an Amending Agreement, which changes clause 8.1 of its franchise agreement with ATCO Gas and Pipelines Ltd. (ATCO Gas). The Amending Agreement would change the maximum level of franchise fee that ATCO Gas is required to pay the City annually from 22.7 per cent to 32 per cent. ATCO Gas filed a related application to amend its rates to reflect the change in franchise fee (Application No ). A Notice of Application was published in the Edmonton Journal and Edmonton Sun on April 12, 2004 in respect of Application No and ATCO Gas s application for a resulting change in its Rider A for the City. The Board received three responses to the notice. The Board initially scheduled a hearing of the applications for July 22, 2004 and a Notice of Hearing was served on all interested parties on May 10, At the request of ATCO Gas, the Board, by letter dated May 20, 2004 changed the format of the hearing from an oral hearing to a written proceeding, which was completed on August 4, The Board considers that the record for this proceeding was closed on August 4, Gordon Miller, Presiding Member, T. M. McGee, Member, and Becky Torrance, Acting Member, as the Board Panel, reviewed the material filed as part of the application. A list of those who participated in the proceeding is contained in Appendix 1 to this Decision. 2 VIEWS OF THE PARTIES 2.1 The City The City has pointed out that findings of the Board in Decision specifically state that the EUB s role in reviewing franchise agreements is of a more general nature than its role in reviewing a utility s costs and rates, and that the fees are identified separately on bills and it is a municipality s responsibility to answer to their residents respecting these fees. The City has identified that in Decision the Board found that a 35 percent cap was reasonable and the City has been cognizant of this in requesting a cap of 32 percent. In addition, the City notes that the 32 percent franchise fee is in lieu of tax while the 35 percent maximum is in addition to 1 Decision Town of Bow Island Review of Proposed Standard Natural Gas Franchise Agreement with ATCO Gas and Pipelines, dated September 9, 2003 EUB Decision (August 31, 2004) 1

6 tax. Unlike the Bow Island agreement the City s agreement does not also allow the City to charge ATCO Gas linear taxes in addition to the franchise fee. The City has applied for an increase in the cap for the franchise fee because the cap in the current agreement has resulted in lower revenues for the City since 1996, despite the fact that the number of customers has increased over the same period of time. The City s budget is made up from various sources other than property taxes. Without an increase in the level of the fee, the total amount of the City s budget received through franchise fees has decreased from 2.4 percent in 1996 to 1.8 percent in The City has made the application to correct this inequity. The City made this decision in council meetings, which are public processes. The City has addressed statements made by the Rate 13 Group 2 in its evidence. The City disputed Rate 13 s claim that it was raising its fee to match higher fees in other municipalities and pointed out that other municipalities such as Calgary would still have significantly higher franchise fees, especially for Rate 13 customers. The City has indicated that the agreement approved by the Board in 1995 Decision E included a statement that the City had the ability to determine the level of the franchise fee at its discretion, up to the maximum fee indicated in the agreement. This does not suggest that the fee was ever intended to be limited to a fee for recovery of the City s costs related to the service provided. Also, the City s right to determine the level of the fee indicates the Board has no statutory authority to direct the City to negotiate a franchise fee with a service provider and other interested parties. The City has indicated that the Board should not be reviewing its application or ATCO Gas s rate application based on a promotion of a certain social policy as requested by the Care Centre Group (CCG). 4 The level of funding for care facilities is a matter of provincial policy. The City has also argued that the fee is not a tax and therefore should not be treated in the same way as property taxes assessed by the City. The City considers that a request for an exemption from the City s franchise fee should only be addressed to City Council. 2.2 ATCO Gas ATCO Gas has argued that the EUB s role in reviewing franchise agreements is to ensure the agreements constitute a reasonable exercise of discretion by the municipality. ATCO Gas has further indicated that the EUB s role would not require the same scrutiny as its oversight of a utility s costs and rates. The EUB should not be substituting its judgment for that of the utility or the municipality. ATCO Gas considers the EUB should approve an agreement unless it considers there has been an abuse of discretion. ATCO Gas has argued that there is no reason to believe this is the case since the only change to the agreement is the franchise fee and the fee is not unreasonable Rate 13 Group representing Canadian Forest Products Ltd., Alberta Distillers Limited, Alberta Processing Company, Northern Alberta Processing, and Canada Malting Decision E95059 and Northwestern Utilities Limited, Application by NUL for approval to amend the Rate Rider A with respect to the. Care Centre Group representing St. Michael s Extended Care Society, Devonshire Care Centre, the Good Samaritan Society, and the Ukrainian Catholic Eparchy of Edmonton 2 EUB Decision (August 31, 2004)

7 ATCO Gas considers the fee to be reasonable for the following reasons: the resulting cost of the revised fee for the average customer ($87.12 in 2004) is still similar to the average franchise fee in the province between 1995 to 2003, and the fee is less than the maximum of 35% included in the AUMA Standard Gas Franchise Agreement, which also allows for the payment of linear taxes in addition to a franchise fee. ATCO Gas has also argued that a franchise fee is not a direct or indirect tax as found by the Board in Decision That Decision also found that the franchise fee is not a regulatory charge, which the City must show is based on the cost of providing a service. 2.3 Rate 13 Group The Rate 13 Group has noted that EUB approval of a franchise agreement is required pursuant to section 45(3) of the Municipal Government Act (MGA) and section 49 of the Gas Utilities Act (GUA). In addition, pursuant to the GUA, the EUB has a responsibility to ensure that rates are just and reasonable and do not discriminate between customers. The Rate 13 Group has argued that the franchise fee increase is not justified on the basis of costs incurred to provide a service; rather, the cost evidence provided by the City is that the franchise agreement is for the exclusive right to ATCO Gas to distribute natural gas in Edmonton and that the fee for these rights includes taxes owed by ATCO to the City. In addition for the rights of exclusivity, the franchise fee is intended to recover the costs of administering the rights of way as stated in CCG-Edm 1. Rate 13 notes that both the City and ATCO Gas have agreed that the value of the franchise agreement has increased by approximately $8.5 million. However, the Rate 13 Group submits that there has not been any evidence submitted to support the increase. Therefore, the Rate 13 Group has argued that the increase in the level of the fee not be approved by the Board as no cost related evidence has been presented. The Rate 13 Group argues that the City exhibited the Pied Piper mentality by increasing their franchise fee largely in part due to other municipalities increasing their franchise fees, and submit that this does not justify the increase in franchise fee. The Rate 13 Group is of the opinion that municipalities have increased their franchise fees mostly since it is more politically palatable when compared to a property tax increase, and submits that this is not appropriate justification to implement a rate increase. The Rate 13 Group has argued that the City has proposed to increase franchise fees rather than property taxes to cover infrastructure costs in the City. Additionally, the Rate 13 Group has pointed out that the property taxes in Edmonton in comparison with other large Canadian municipalities are lower since franchise fees, rather than property taxes, are being utilized to recover such costs. The Rate 13 Group notes that this is wrong as legislation sets out that infrastructure costs primarily be recovered through property taxes. The Rate 13 Group points out that the proposed rate cap to specific customer groups where the amounts become unreasonable suggests that the franchise fees are too high and if the fee were reasonable, a cap would not be necessary. Furthermore, the Rate 13 Group has argued that the proposed franchise fee rate increase would unjustly discriminate between types of customers as 5 Decision City of Grande Prairie Natural Gas Franchise Amendment with ATCO Gas and Pipelines Ltd., dated November 12, 2003, p. 2 EUB Decision (August 31, 2004) 3

8 the proposed increase would disproportionately increase rates to industrial customers as franchise fees are based on consumption as opposed to property values. The Rate 13 Group has indicated that the franchise fee increase by the City has a material impact on the economic viability of these customers. It will affect the Rate 13 Group members both directly for facilities and indirectly by setting a precedent for other municipalities to use as justification for higher franchise fees. 2.4 CCG The CCG has argued that organizations represented by the CCG should be exempt from paying franchise fees since the fee represents an indirect tax to those groups who are normally exempt from direct taxation as set out by legislation. The CCG has pointed out that in the City s response to CCG-Edm 2, the City acknowledged that the franchise fee is in lieu of linear or property taxes that would have been payable by ATCO Gas. The CCG has noted the organizations it represents are primarily exempt from the burden of a property tax and therefore should be exempt from the franchise fee. The CCG has stated that if the Board determines that this group should pay the franchise fee, the CCG argued that the maximum amount payable by these customers should be only the cost of service amount and not the portion attributable to ATCO Gas s rights of exclusivity. If the Board determines that the CCG must pay the fee in its entirety, the CCG notes that the amount should be separated as to identify those portions recovered for cost of service and those for portions allocated to exclusivity. The CCG has agreed with the Rate 13 Group s argument in general, except its position respecting rate caps. The CCG agrees that the proposed rate cap would appear inappropriate if it were to benefit only a few large industrial customers at the expense of all others who pay the franchise fee. However, the CCG does not oppose rate caps if the shortfall resulting from the cap were recovered from taxpayers or by utility shareholders. The CCG opposes the rate cap for industrial customers because it believes the level of the franchise fee could be lower if the cap were removed. The CCG has pointed out that it is the legislated mandate of the City that their contractual commitments ensure the safety, health and welfare of people. The CCG argues that the City has neglected to consider the position of the CCG members and the unreasonable burden this fee will present. The CCG has pointed out that the Board should direct the applicants to resume negotiations on the basis that the unreasonable burden be considered by the City in requesting the proposed rate increase. 3 VIEWS OF THE BOARD The Board has considered its jurisdiction and therefore its role in reviewing this application. Although section 49 of the GUA indicates that a franchise granted to an owner of a gas utility is not valid until it is approved by the EUB, only section 45 of the MGA requires that an amendment of a franchise agreement requires approval of the EUB. In addition, section 360 of 4 EUB Decision (August 31, 2004)

9 the MGA specifically provides a municipality with a right to enter into the type of agreement that is the subject of the proposed amendment in this application. Section 360(1) states: Tax agreement 360(1) A council may make a tax agreement with an operator of a public utility or of linear property who occupies the municipality s property, including property under the direction, control and management of the municipality. The Board notes that the Rate 13 Group s primary argument has been that the revised franchise fee is not reasonable because it is not based on costs of the franchise rights such as the costs to administer the rights-of-way and a linear tax payment. The Rate 13 Group has argued that the higher level of franchise fee should not be approved because the City has not proven it is cost based. Such an argument would have bearing only in a rate application. There is nothing to suggest in the MGA that a fee pursuant to section 360 should be limited to a recovery of costs. Nor does the argument of the Rate 13 Group recognize the City s rights to charge for use of its property, without restrictions, pursuant to section 61 of the MGA. The Board considers that although it has a responsibility to ensure that the franchise fees are within reason, it would not review a franchise fee being charged by a municipality pursuant to the MGA on the same basis it would review a gas utility s rates pursuant to the GUA. Nor would the Board assess a franchise fee on the basis of how a municipality would make use of the amounts received from the franchise fee. In Decision the Board stated: The Board has considered the criteria that should be used in reviewing franchise agreements pursuant to section 45 of the MGA and section 49 of the GUA. Although the Board considers its review of franchise agreements should ensure that the fees are not unreasonable, the Board also considers that it should review these agreements from a more general perspective than when it reviews a utility s costs and rates. Since the EUB does not proceed on a cost of service basis when reviewing agreements pursuant to section 360, the Board would not consider that a franchise fee is unreasonable on the basis that the fee has not been proven to reflect the costs of the municipality in granting the franchise. Also, given the EUB s general supervisory overview of the agreements, it would not appear to be appropriate to require a municipality to negotiate such a fee pursuant to the EUB s Negotiated Settlement Guidelines, which have been developed for use as an alternative to a full review of utility rates by the EUB through the hearing process. It would be within the municipality s discretion to determine whether or not it will change its methods of negotiating a franchise fee. In Decision the Board reviewed a standard AUMA electric franchise agreement, which in its original form included a provision that would allow municipalities to set the level of a franchise fee at their discretion. In its review the Board indicated that given its role with respect to such fees it could not approve an agreement with such a provision unless there was a set maximum for the franchise fee. Without a maximum fee identified the Board would no longer have the ability to ensure that the fee would continue to be within reason. However the Board recognized that if there were a maximum fee identified in the agreement, the Board could 6 7 Decision City of Grande Prairie Natural Gas Franchise Amendment with ATCO Gas and Pipelines Ltd., dated November 12, 2003, p. 9 Decision Alberta Urban Municipalities Association Standard Electric Franchise Agreement with ATCO Electric Ltd. and UtiliCorp Networks Canada, dated June 19, 2001 EUB Decision (August 31, 2004) 5

10 exercise its general supervision over these fees by a review of the maximum, while allowing municipalities to exercise their discretion to change the level of fee within the limits of the identified maximum fee. In 2003 the Board approved the ATCO Gas franchise agreement with the Village of Bow Island 8 and the AltaGas Utilities Inc. franchise agreement with the Town of Bonnyville, 9 both of which included provisions for a maximum franchise fee of 35 per cent, which is in addition to other municipal taxes. These agreements were based on a standard gas franchise agreement that was negotiated between the AUMA and the gas utilities and were considered on that basis of whether or not the agreements were reasonable for the municipality and whether or not the standard agreement was reasonable for municipalities in general in the province. The Board approved the agreements after public hearings because it considered a maximum franchise fee of 35 per cent was within reason. However, the Board recognized that a municipality could inappropriately use the flexibility granted through a maximum fee of 35 per cent, if it arbitrarily increased the fee to the maximum level allowed without corresponding circumstances to warrant such a change in the level of the fee. In that case the Board indicated as follows on page 9 of Decision : The Board will continue to have a responsibility to ensure that utility rates are just and reasonable. Based on this responsibility, if in future, gas utility rates increase significantly, and at the same time municipal franchise fees increase significantly within the 35 per cent cap, resulting in an onerous burden on ratepayers, the Board would be prepared to hear complaints from affected ratepayers respecting the increased franchise fee, provided that the ratepayers first seek a resolution of their concerns from their municipality. It is noted that the Amending Agreement would result in a fee that is within the 35 per cent maximum, which has been approved as a reasonable maximum for a franchise fee. However, as indicated in the identified caveat, a fee that is within the 35 per cent maximum could still be considered unreasonable. The Board recognizes that the franchise agreement between the two parties does not include a provision for payment of property taxes as well as the maximum franchise fee of 32 per cent. This would mean that the proposed maximum franchise fee is not directly comparable to the 35 per cent maximum previously approved by the Board, which is in addition to applicable property taxes. It is also noted that since 1996, the revenues collected through this fee for the City have decreased, despite the fact that the number of customers within the City has increased. This would indicate that the City would have to increase the level of the franchise fee to maintain comparable franchise fee revenues from those received when the fee was last adjusted. The Board notes ATCO Gas s response to BR-ATCO Gas-1, which indicated that the amount paid by the average residential customer in 1996, with a franchise fee of 22.7 per cent, was $75.15 and in 2003 the same usage would have resulted in a fee of $66.19, which is 12 per cent less than the amount paid in In 2004, with an annual fee of 32 per cent, the same usage would result in an annual fee of $ Consequently it is noted that, although the level of the 8 9 Decision dated September 9, 2003 Decision dated September 9, EUB Decision (August 31, 2004)

11 fee is increasing by 41 per cent, the resulting increase in the amount paid by an average residential customer in 2004 from 1996 is only 16 per cent. It is noted the effect of the change in the level of the fee for Rate 13 customers since 1996 has been more significant. The fee paid by the average Rate 13 customer in 1996 was $2,318 while the amount that would be paid in 2004, at an annual rate of 32 per cent, would be $4,874. However, this amount is still favourable to Rate 13 customers when compared with the amounts paid by other Rate 13 customers in the province, as indicated in BR-ATCO Gas-1. In fact, of the 126 ATCO Gas municipalities that collect franchise fees, 79 have fees that would result in a higher franchise fee for Rate 13 customers. For 47 of those municipalities, an average Rate 13 customer would pay an annual fee of $10,000 to $20,000. The Board recognizes that all of these municipalities have a franchise fee based on both the delivery charges and the deemed value of the natural gas. However, it would still seem that the Rate 13 customers in Edmonton have benefited generally from the delivery based fee chosen. Not only have the charges been lower than in many other municipalities, these customers have also benefited from the greater stability inherent in a delivery based franchise fee. The Board is therefore not convinced that an average franchise fee of $4,874 represents an unreasonable burden for Rate 13 customers located in the City. This review of the circumstances that have preceded the City s decision to increase the level of the franchise fee, would not suggest that the City has used its discretion inappropriately in setting the level of the franchise fee. Nor would this basic review of the resulting costs to customers indicate that such a fee results in an unreasonable burden on customers as a whole. The Board understands the Rate 13 Group s concern that allowing a cap on the fee for certain types of customers could result in a higher fee to be paid by other customers, which would not seem fair to the balance of customers. This would not appear to be the intent of the City in capping the fee for high load use customers, because there is no indication that the fee has been increased proportionately for the balance of customers, to make up for the lower fee charged to high load use customers. The Board has considered the history of the franchise fee in Edmonton in relation to the cap for high load use customers. A review of past decisions of the Board would indicate that the City has a long history of providing a different level of franchise fee for high load use customers. While the level of fee has changed on occasion for these customers, the City has not changed the level of the fee for the balance of customers at the same time. The Board notes that city council considered an identified customer concern respecting the increase in the franchise fee at its council meeting of January 20, This representation led to a change in the franchise fee methodology for high load use customers. This would suggest that the City has given consideration to the impacts resulting from the change in the level of the fee. The Board has considered the CCG s argument that the organizations it represents are exempt from property taxes and therefore should be exempt from the franchise fee on the basis that a franchise fee is a form of indirect taxation. The Board considered whether or not a franchise fee is an indirect tax in Decision and concluded that a franchise fee is not an indirect tax. The Board sympathizes with the concerns of the CCG regarding the effect of increasing utility costs for care centres. However, in reviewing franchise agreements, the Board does not make it a EUB Decision (August 31, 2004) 7

12 practice to substitute its judgment for that of the municipality. Municipalities, as governing bodies, would be expected to base their decisions on various factors, including social considerations, while the Board is prohibited from setting rates that are unduly discriminatory or preferential. Although the legislation has not identified on what basis the Board should review franchise agreements, it is reasonable to presume that the Board would not require changes to an agreement that would only benefit a select number of customers within the municipality, unless the agreement includes provisions that would allow for an unfair treatment of those customers compared to the treatment of other customers. The Board is not convinced that the care centre customers are being treated unfairly in relation to other customers, some of which may also have experienced difficulties with increased utility costs. Furthermore the Board recognizes that the City has the option to adjust the fee so that it would apply to certain types of customers at a rate that is less than the maximum identified in the agreement, as it currently does for high load use customers. It would therefore appear that the appropriate forum for the CCG to make its request for an exemption from payment of the franchise fee is at City Council, which would still have the opportunity to adjust the franchise fee to accommodate specific customers. Any changes to the franchise agreement would require Board approval. 8 EUB Decision (August 31, 2004)

13 4 ORDER The Alberta Energy and Utilities Board, pursuant to section 45 of the Municipal Government Act, R.S.A. 2000, c. M-26, hereby orders as follows: (1) Application No by the dated January 23, 2004 is approved, subject to the terms and conditions herein contained. (2) The shall file with the Alberta Energy and Utilities Board a copy of the executed Amending Agreement. Dated in Calgary, Alberta on August 31, ALBERTA ENERGY AND UTILITIES BOARD (original signed by) Gordon J. Miller Presiding Member (original signed by) T. M. McGee Member (original signed by) B. Torrance Acting Member EUB Decision (August 31, 2004) 9

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15 APPENDIX 1 PARTIES PARTICIPATING IN THE PROCEEDING Principals and Representatives (Abbreviations Used in Report) (the City) M. Sherk ATCO Gas and Pipelines Ltd. (ATCO Gas) H. M. Kay Care Centre Group (CCG) A. O. Ackroyd, Q.C. R. Bellows Rate 13 Group L. Manning Direct Energy Regulated Services K. Miller EUB Decision (August 31, 2004) 11