Decision 2010-192 Disposition of Assets April 30, 2010
ALBERTA UTILITIES COMMISSION Decision 2010-192: Disposition of Assets Application No. 1606042 Proceeding ID. 569 April 30, 2010 Published by Alberta Utilities Commission Fifth Avenue Place, 4th Floor, 425-1 Street SW Calgary, Alberta T2P 3L8 Telephone: (403) 592-8845 Fax: (403) 592-4406 Web site: www.auc.ab.ca
Contents 1 INTRODUCTION... 1 2 BACKGROUND... 1 3 REGULATORY FRAMEWORK... 3 4 COMMISSION FINDINGS... 4 4.1 Financial Harm... 5 4.2 Continuity of Safe and Reliable Service... 7 4.3 Effects on Customers... 8 4.4 Conclusion...8 5 ORDER... 9 APPENDIX 1 PROCEEDING PARTICIPANTS... 11 APPENDIX 2 SUMMARY OF COMMISSION DIRECTIONS... 12 AUC Decision 2010-192 (April 30, 2010) 1
ALBERTA UTILITIES COMMISSION Calgary Alberta Decision 2010-192 CU WATER LIMITED Application No. 1606042 DISPOSITION OF ASSETS Proceeding ID. 569 1 INTRODUCTION 1. (CU Water) filed an application (Application) with the Alberta Utilities Commission (AUC or Commission) on April 1, 2010 pursuant to section 101(2)(d) of the Public Utilities Act 1 and section 1(1)(k) of the Public Utilities Designation Regulation. 2 The Application seeks an order from the Commission approving the sale of substantially all the assets of CU Water s entire water supply system and water distribution system to the Highway 14 Regional Water Services Commission (HRWS). CU Water also sought Commission approval to retain all of the sale proceeds from the asset sale. The sale is pursuant to the terms of an asset sale agreement, made as of March 10, 2010 between CU Water and the HRWS (the Asset Sale Agreement). The HRWS paid CU Water $15.2 million for the water supply system. 2 BACKGROUND 2. CU Water, a wholly-owned subsidiary of CU Inc., is the owner of the Water Supply System 3 currently serving communities that are members of the HRWS and also Camrose County. CU Water was incorporated to offer water transmission, distribution and treatment to communities throughout Alberta. It operates as a utility regulated by the Commission and is designated as an owner of a public utility pursuant to section 1(1)(k) of the Public Utilities Designation Regulation. 3. The HRWS is a regional services commission formed pursuant to the Municipal Government Act, 4 and the Highway 14 Regional Water Services Commission Regulation. 5 Beaver County, Strathcona County, the Town of Tofield, the Village of Holden, the Village of Ryley and the Town of Viking comprise the HRWS. The HRWS is not designated as an owner of a public utility under the Public Utilities Designation Regulation and, as a regional services commission, is expressly excluded from being designated as an owner of a public utility pursuant to section 1(h)(ii)(B) and section 1(j) of the Public Utilities Act. 4. CU Water provides potable water to its customers through its Water Supply System. CU Water purchases the water from the HRWS and then transports the water through its Water Supply System for sale to customers. CU Water: 1 2 3 4 5 R.S.A. 2000, c. P-45. Alta. Reg. 194/2006. As defined in the Asset Sale Agreement. The Water Supply System includes all water transmission lines and water distribution lines, water pipelines, water reservoirs, meters and valves, together with all equipment, installations, accessories and attachments forming a part thereof. R.S.A. 2000, c. M-26. Alta. Reg. 154/1990. AUC Decision 2010-192 (April 30, 2010) 1
a. Supplies water to the Village of Ryley, the Village of Holden, Beaver County, and in defined areas of Strathcona County and Camrose County pursuant to the terms of exclusive franchise agreements with each of these entities; b. Supplies water to the Town of Viking pursuant to the terms of a water supply agreement; c. Makes bulk water sales to the Town of Tofield; and d. Sells water at the Ardrossan Truck Fill Station and Truck Fill Stations located in Beaver County. 5. The Water Supply System was constructed pursuant to an agreement made between a company affiliated with CU Water (the agreement was later assigned to CU Water) and the HRWS. That agreement provides an option for the HRWS to purchase parts of the Water Supply System in stages. If the HRWS exercises this option, CU Water has the right to compel the HRWS to purchase other parts of the Water Supply System. 6. In 2008, the HRWS notified CU Water that it intended to exercise its option to purchase a portion of the Water Supply System between Sherwood Park and the Village of Ryley. The HRWS also expressed its interest to purchase the balance of the Water Supply System. T he parties then entered into the Asset Sale Agreement. 7. The Asset Sale Agreement involves the sale of substantially all of the assets comprising CU Water's entire Water Supply System, which constitutes substantially all of the assets of CU Water. CU Water will retain certain Excluded Assets. 6 8. The Commission published a Notice of Application for this proceeding on its website and also published the Notice in the Sherwood Park/Strathcona County News on April 9, 2010, and the Viking Review and Tofield Mercury on April 13, 2010. Parties who wished to participate in the proceeding were required to file statements of intent to participate (SIPs) by no later than April 19, 2010. 9. The Commission issued preliminary information requests to CU Water on April 13, 2010 and received responses from CU Water on April 19, 2010. The Commission did not receive any SIPs in response to the Notice of Application. The Commission considers the record for this proceeding to have closed on April 19, 2010. The Commission assigned its Vice-Chair, Carolyn Dahl Rees, to deal with this Application. 10. In reaching the determinations set out in 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 understanding the Commission s reasoning relating to a particular matter and should not be taken as an indication that the Commission did not consider all relevant portions of the record with respect to that matter. 6 Excluded Assets is defined in the Asset Sale Agreement and includes CU Water s office lease in Edmonton together with the contents and office equipment, two vehicles, a software service agreement between CU Water and ATCO I-Tek, the rights to the name CU Water and certain other non-material assets. 2 AUC Decision 2010-192 (April 30, 2010)
3 REGULATORY FRAMEWORK 11. CU Water filed its Application pursuant to section 101(2)(d) of the Public Utilities Act. That section states: 101(2) No owner of a public utility designated under subsection (1) shall [ ] (d) without the approval of the Commission, (i) (ii) sell, lease, mortgage or otherwise dispose of or encumber its property, franchises, privileges or rights, or any part of them, or merge or consolidate its property, franchises, privileges or rights, or any part of them, and a sale, lease, mortgage, disposition, encumbrance, merger or consolidation made in contravention of this clause is void, but nothing in this clause shall be construed to prevent in any way the sale, lease, mortgage, disposition, encumbrance, merger or consolidation of any of the property of an owner of a public utility designated under subsection (1) in the ordinary course of the owner s business. 12. Pursuant to section 101(2)(d)(i) of the Public Utilities Act, the Commission s approval is required for the sale of property by a designated utility if the sale is outside the ordinary course of the designated utility s business. Section 1(1)(k) Public Utilities Designation Regulation, designates CU Water as a public utility to which section 101(2)(d) of the Public Utilities Act applies. 13. The Commission accepts that CU Water requires Commission approval to sell the Water Supply System to HRWS pursuant subsection 101(2)(d) of the Public Utilities Act. CU Water proposes to sell all or substantially all of its regulated water utility assets (excluding the Excluded Assets) as a going concern. Such a transaction is not within CU Water s ordinary course of business. 14. Section 101(2) of the Public Utilities Act does not specify what test the Commission should use when considering an application under that section. The Commission s predecessor, the Alberta Energy and Utilities Board (Board), developed a no-harm test when evaluating applications under that section. 7 This test is employed by the Commission. 7 This test has been applied by the Board when considering asset dispositions including transfers of regulated businesses in Decision 2000-41, Decision 2000-71: UtiliCorp Networks Canada (Alberta) Ltd. And UtiliCorp Networks Canada Ltd., Sale of Certain Assets to EPCOR Energy Services (Alberta) Inc. and Appointment of EPCOR Energy Services (Alberta) Inc. as Provided of the Regulated Rate Option (Application No. 2000269, File No. 1900-4) (Released: November 24, 2000), Decision 2003-098 and Decision 2004-035: Aquila Networks Canada Ltd Sale of all Outstanding ANCA Shares to Fortis Alberta and Certain Fortis Alberta and ANCA Financing Matters (Application No. 1317233, File No. 6418-3 and Application No. 1318425, File No. 6420-1) (Released: April 29, 2004) AUC Decision 2010-192 (April 30, 2010) 3
15. The rationale for applying the no-harm test was summarized by the Board in Decision 2000-41. 8 That test originates from the Commission s authority to safeguard the public interest in the nature and quality of the service provided to the community by public utilities. The Commission s authority in this regard is of the widest proportions. 9 16. The no-harm test balances the potential positive and negative effects of the proposed sale of the water utility on customers to ensure that they are at least no worse off after the transaction is completed. 17. In assessing the merits of the Application, the Commission takes into account its public interest mandate, the positions of customer groups, and any potential effects or ramifications of the Application. An expression of the no-harm test by the Board, can be found in Decision 2003-098. 10 There, the Board said: [ ] The Board s no-harm test considers the transaction in the context of both potential financial impacts and service level impacts to customers. The Board also assesses the prudence of the sale transaction. As well, the Board considers whether the availability of future regulatory processes might be able to address any potential adverse impacts that could arise from a transaction. 11 18. In Decision 2000-41 the Board stated that it should conduct a balancing of both the potential positive and negative effects of the transaction to determine whether it is in the overall public interest. As a result, rather than simply asking whether customers will be adversely affected by some aspect of the transaction, the Commission will weigh the potential positive and negative effects of the transaction to determine whether the balance favours customers or at least leaves them no worse off. 19. The Commission has considered the potential effects of the Asset Sale Transaction in light of the Municipal Government Act and the Highway 14 Regional Water Commission Regulation, which enable the HRWS to hold an interest in a water utility to serve its member communities and others. 20. The onus is on CU Water, as applicant, to satisfy the Commission that the Application should be approved. CU Water submitted that since the assets will be owned and operated by HRWS and the customers are residents of the municipalities who are members of the HRWS, there is no harm to customers that requires mitigation. 4 COMMISSION FINDINGS 21. In the following sections, the Commission considers whether the transaction will harm customers financially, whether safe and reliable service will continue after the transaction closes 8 9 10 11 Decision 2000-41: TransAlta Utilities Corporation Sale of Distribution Business (Application No. 2000051, File No. 6404-3) (Released: July 5, 2000). ATCO Ltd. v. Calgary Power Ltd. [1982] 2 S.C.R. 557, at 576 (per Estey J.) Decision 2003-098: ATCO Electric Ltd., ATCO Gas North and ATCO Gas South, Both Operating Divisions of ATCO Gas and Pipelines Ltd., Transfer of Certain Retail Assets to Direct Energy Marketing Limited and Proposed Arrangements with Direct Energy Regulated Services to Perform Certain Regulated Retail Functions (Application No. 1299855) (Released: December 4, 2003). Decision 2003-098 at page 4. 4 AUC Decision 2010-192 (April 30, 2010)
and whether the balance of potential positive or negative effects of the transaction would favour customers or at least leave them no worse off. 4.1 Financial Harm 22. Customers can be harmed financially from the sale of a regulated business. As discussed above, the Board considered that customers should remain at worst cost neutral as a result of a sale. 23. The Commission finds that customers will likely not suffer financial harm if the transaction closes, for the following three reasons. 24. First, this transaction is unique because it can be viewed as one in which elected representatives of customers have decided to purchase the assets of the water utility. Councilors of the municipalities forming the HRWS sit on its board of directors. The councilors represent the interest of customers, who are residents and businesses in their respective municipalities, and also the municipalities themselves. 25. Camrose County does not have a representative on the HRWS board of directors. CU Water informed Camrose County of this transaction. Camrose County did not file a SIP with the Commission to object to the transaction nor did any customer. 26. Second, the HRWS stated that it expects to be able to reduce commodity rates charged to customers and also certain fixed charges although the purchase price and costs associated with the transaction such as legal fees, real estate transfer costs, taxes, termination costs, will be included in future rates as a result of the asset sale. 12 27. These fees and the amount paid by the HRWS to acquire CU Water s business (approximately $15.2 million including a premium over book value of approximately $2 million) 13 will be a material financial cost to customers if the transaction closes. The majority of customers, through their representatives, accept these costs and no other party objects to them. 28. The amounts will ultimately have to be recovered from customers because section 4(1) of the Highway 14 Regional Water Service Commission Regulation 14 requires the HRWS to charge fees for supplying treated water service on a full cost recovery basis and section 602.21 of the Municipal Government Act requires the HRWS to operate without a deficit. Since the sale of water is the only source of income for the HRWS all costs incurred by HRWS to acquire the assets will be paid through the rates charged to customers. 29. Nonetheless the HRWS expects that customers will experience a net reduction in their rates if the transaction closes. The HRWS expects commodity charges to decrease by $0.60/m 3, from $3.56/m 3 to $2.96/m 3, and also expects monthly fixed charges to decrease. The commodity rate reduction is significant because the majority of CU Water s revenues are derived through the commodity rate. 15 The HRWS is, however, considering an increase to CU Water s current 12 Exhibit 7, CU Water Response to AUC-CU-2. 13 The purchase price is subject to adjustment. 14 AR 154/90. 15 Decision 2006-113: General Rate Application (Application No. 1459900) (Released: November 21, 2006) Appendix 3. AUC Decision 2010-192 (April 30, 2010) 5
connection fee to reflect the average cost of connections and expects to increase its remaining schedule of fees to reflect inflation. 30. The HRWS says that it can accomplish these rate reductions because unlike CU Water, the HRWS does not operate to generate a profit, cannot make distributions to members and does not pay income or municipal taxes. Section 298(1)(b) of the Municipal Government Act exempts water utilities owned by regional service commissions from municipal tax assessments and section 262(1)(f) of the Municipal Government Act exempts property owned by regional service commissions from taxation. Based on these savings, and others that are planned (the HRWS plans to decrease debt and reduce overhead costs), customers will likely be better off after the transaction closes. 16 31. Third, even though section 1(h) of the Public Utilities Act excludes regional services commissions, such as the HRWS, from the definition of an owner of a public utility, the Commission will retain a limited jurisdiction over the operations of HRWS after the transaction closes. 32. As pointed out by CU Water, regional service commissions are excluded from Commission regulation under the Public Utilities Act. However, the Commission has some jurisdiction over them. Section 602.14(1)(a) of the Municipal Government Act allows the Commission to hear disputes between a regional services commission and another regional services commission or any municipal authority over rates, tolls or charges for a service that is a public utility, among other things. 17 Section 602.14 states: 602.14 If there is a dispute between a commission and another commission or a commission and any municipal authority with respect to (a) (b) (c) rates, tolls or charges for a service that is a public utility, compensation for the acquisition by the commission of facilities used to provide a service that is a public utility, or the commission s use of any road, square, bridge, subway or watercourse to provide a service that is a public utility, any party involved in the dispute may submit it to the Alberta Utilities Commission and the Alberta Utilities Commission may issue an order on any terms and conditions that the Alberta Utilities Commission considers appropriate. Thus, to the extent any financial harm is caused to any municipal authority that is a customer of HRWS, that harm can be addressed by the Commission in a complaint proceeding where the harm relates to a dispute about a rate, toll or charge for service that is a public utility. 33. In addition to the Commission s limited jurisdiction over regional service commissions, the HRWS operations are subject to oversight under the Municipal Government Act. That Act 16 17 Exhibit 7, CU Water Response to AUC-CU-2. Municipal Government Act, section 602.14(a). 6 AUC Decision 2010-192 (April 30, 2010)
confers jurisdiction over regional service commissions with respect to certain matters on the Municipal Government Board and also the Minister of Municipal Affairs. 18 4.2 Continuity of Safe and Reliable Service 34. In the context of a proposed sale of a regulated business, the Commission considers whether the purchaser can continue to provide safe and reliable service to customers with minimal disruption, when deciding whether to approve the proposed sale. 35. The Commission finds that the HRWS will be able to provide safe and reliable service to customers and that the transfer of the Water Supply System from CU Water to HRWS will not result in more than minimal disruption for the following four reasons. 36. First, the HRWS plans to retain some existing staff of CU Water. In doing so the HRWS will retain some of CU Water s expertise in how to run the Water Supply System safely and reliably. The HRWS will retain one full time water operator and one meter reader / assistant operator both of whom are currently employed by CU Water. These employees have accepted employment with the HRWS. 37. Also, the HRWS already has some degree of expertise in operating the Water Supply System safely and reliably. The HRWS already employs an operations director who was previously a manager for CU Water. The HRWS also has a chief administrative officer that has been with the HRWS since its inception. 38. Second, safe and reliable service will be facilitated by CU Water during the transition of ownership from CU Water to the HRWS. CU Water agreed to an HRWS request for operational assistance during an ownership transition period of up to three months after the transaction closes. 39. During this transition period, the HRWS will use field staff that worked in the same capacity with CU Water. They will continue: (i) to operate the Water Supply System; (ii) to test water, (iii) to provide on call service; (iv) to read meters; (v) to install new services; and (vi) to perform line locations for excavators. They will do these tasks at the same level of service currently employed by CU Water to ensure a seamless transition for customers. CU Water and the HRWS assured the Commission that during the transition service and water quality standards will not be affected, and no customers will lose service due to the transfer of the assets. 40. Third, CU Water submitted that the transaction was not expected to have any negative effect on how customers are served. CU Water submitted that if the Commission approves the transaction, the change in ownership, from a service level perspective, would be seamless. All customers currently served by CU Water will continue to be served once the asset sale closes. 41. The HRWS stated that it will be adopting a slightly modified version of the approved Water Service Regulations employed by CU Water and that the terms and conditions of service for customers will remain much the same. CU Water confirmed that after the transaction closes end-users in Camrose County will have the same commodity rate reduction as other end-users of 18 See for example Municipal Government Act, section 602.15, section 602.35 and section. 602.4. AUC Decision 2010-192 (April 30, 2010) 7
the water supply system and will continue to pay the current 15 per cubic meter surcharge approved by the Commission in Decision 2007-095. 19 42. Finally, water quality standards will not change as a result of the transaction. Water quality standards are regulated by Alberta Environment. The Commission understands that municipal water systems, operator certification, water source protection and compliance are covered under the Environmental Protection and Enhancement Act and various regulations, codes and approvals. 20 Potable water systems in Alberta must be constructed to Alberta Environment design standards and operated according to provincial facility approvals. 43. CU Water and the HRWS stated that they have had meetings with Alberta Environment and that documents transferring the Water Supply System s code of practice registration number to the HRWS have been prepared. Water quality testing will also be maintained at current levels. According to CU Water that testing is currently performed at levels that are higher than required. 4.3 Effects on Customers 44. The HRWS submitted that its expectation was that rates to customers would decrease after the transaction due to the fact that the costs of profit and income taxes will no longer be included in customer rates. Its position on this matter is set out in more detail in paragraphs 26 30 above. No evidence was provided to the Commission indicating a potential adverse effect on customers. Based on the record of this proceeding the Commission considers that the primary positive effect of the transaction is the potential for decreased rates. The Commission also notes that the HRWS has a mandate to supply water to member municipalities and other persons. 4.4 Conclusion 45. The Commission considers that the Application is consistent with the policy expressed in the Municipal Government Act and the Highway 14 Regional Services Commission Regulation which enables regional service commissions, such as the HRWS, to provide treated water services to member municipalities and others. Customers, if they have a dispute with the HRWS about an aspect of their service, may have some recourse to the Commission, the Municipal Government Board or the Minister of Municipal Affairs. 46. The Commission concludes that, on balance, customers will be at least no worse off either in terms of quality of service or level of rates as a result of the transaction. No party objected to the Application and the evidence does not suggest that levels of service would be inferior to current levels of service or that rates would increase. Rather it appears that rates will decrease as a result of the transaction. The Commission is also comfortable that during the transition period, service to customers will be seamless. There is no evidence to suggest that customer service would be disrupted in future or that there would be adverse effects on water quality. 19 20 Decision 2007-095: Request for Increase in Rates for Camrose County Customers (Application No. 1515385) (Released: ).December 4, 2007 Environmental Protection and Enhancement Act, R.S.A. 2000, c. E-12, Part 7; Potable Water Regulation, Alta. Reg. 277/2003. The Potable Water Regulation requires that water from regulated waterworks systems meets Health Canada s Guidelines for Canadian Drinking Water Quality. The Potable Water Regulation also requires all facilities to meet the Alberta Environments Standards and Guidelines for Municipal Waterworks, Wastewater and Storm Drainage Systems. 8 AUC Decision 2010-192 (April 30, 2010)
47. For the foregoing reasons, the Commission approves the Application pursuant to section 101(2)(d) of the Public Utilities Act. The Commission directs CU Water to notify affected customers of the sale, as described in the response to AUC-CU-1(d). 48. Further, the Commission directs CU Water to notify the Commission of: a. the closing date for the transaction, when the date is known; and, b. the date that the HRWS becomes the provider of the water services. 5 ORDER 49. IT IS HEREBY ORDERED THAT: (1) The Commission approves the sale CU Water s assets, as set out in the Asset Sale Agreement and as described in the Application, to the Highway 14 Regional Water Services Commission. Dated on April 30, 2010. ALBERTA UTILITIES COMMISSION (original signed by) Carolyn Dahl Rees Vice-Chair AUC Decision 2010-192 (April 30, 2010) 9
APPENDIX 1 PROCEEDING PARTICIPANTS Name of Organization (Abbreviation) Counsel or Representative (CU Water) D. Cook Alberta Utilities Commission Commission Panel C. Dahl Rees, Vice-Chair Commission Staff P. Khan (Commission Counsel) P. Howard C. Taylor AUC Decision 2010-192 (April 30, 2010) 11
APPENDIX 2 SUMMARY OF COMMISSION DIRECTIONS This section is provided for the convenience of readers. In the event of any difference between the Directions in this section and those in the main body of the Decision, the wording in the main body of the Decision shall prevail. 1. For the foregoing reasons, the Commission approves the Application pursuant to section 101(2)(d) of the Public Utilities Act. The Commission directs CU Water to notify affected customers of the sale, as described in the response to AUC-CU-1(d)..... Paragraph 47 2. Further, the Commission directs CU Water to notify the Commission of:... Paragraph 48 a. the closing date for the transaction, when the date is known; and, b. the date that the HRWS becomes the provider of the water services. 12 AUC Decision 2010-192 (April 30, 2010)