CPCN for the Purchase of the Utility Assets of the City of Kelowna

Transcription

SIXTH FLOOR, 900 HOWE STREET, BOX 250
VANCOUVER, BC CANADA V6Z 2N3
TELEPHONE: (604) 660-4700
BC TOLL FREE: 1-800-663-1385
FACSIMILE: 1604) 660-1102
ERICA HAMILTON
COMMISSION SECRETARY
Commission.Secretary@bcuc.com
web site: http://www.bcuc.com
Log No. 41816
VIA EMAil
electricity.regulatory.affairs@fortisbc.com
March 26, 2013
Mr. Dennis Swanson
Director, Regulatory Affairs
Regulatory Affairs Department
FortisBC Inc.
Suite lOa, 1975 Springfield Road
Kelowna, BC V177V7
Dear Mr. Swanson:
Re: FortisBC Inc.
Application for a Certificate of Public Convenience and Necessity
for the Purchase of the
Assets of the
of Kelowna
Further to your November 13, 2012, Certificate of Public Convenience and Necessity Application for the
Purchase of the Utility Assets of the City of Kelowna, enclosed please find the Commission Panel's Reasons for
Decision as Appendix A to Commission Order C-4-13. Recognizing the compliance filing is to be filed on Sunday,
March 31, 2013, the Commission hereby grants FortisBC Inc. leave to file the week of April 8, 2013.
Iyl
Enclosure
cc:
Registered Interveners
(FBC-PUAKelowna-RI)
PF/FBC-CPCN-Kelowna Assets/GC/03-26-2013J-4-13 Reasons for Decision_FBC CPCN-PUA of Kelowna
SIXTH FLOOR, 900 HOWE STREET, BOX 250 VANCOUVER, B.C. V6Z 2N3 CANADA web site: http://www.bcuc.com B R I T I S H C O L U M B I A U T I L I T I E S C O M M I S S I O N ORDER NUMBER C‐4‐13 TELEPHONE: (604) 660‐4700 BC TOLL FREE: 1‐800‐663‐1385 FACSIMILE: (604) 660‐1102 BEFORE: IN THE MATTER OF the Utilities Commission Act, R.S.B.C. 1996, Chapter 473 and An Application by FortisBC Inc. for a Certificate of Public Convenience and Necessity for the Purchase of the Utility Assets of the City of Kelowna D.M. Morton, Commissioner A.A. Rhodes, Commissioner March 1, 2013 B.A. Magnan, Commissioner CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY WHEREAS: A. On November 13, 2012, FortisBC Inc. (FortisBC) filed an application with the British Columbia Utilities Commission (BCUC or the Commission) pursuant to sections 45 and 46 of the Utilities Commission Act (Act) for a Certificate of Public Convenience and Necessity (CPCN) for an extension of its distribution system resulting from its purchase of the electricity distribution assets of the City of Kelowna (Transaction), and further sought an order pursuant to sections 59 and 60 of the Act, to include the impact of the Transaction in its revenue requirements (Application); B. FortisBC and the City of Kelowna (City) negotiated the City of Kelowna Asset Purchase Agreement (Agreement) which transfers ownership of the City‐owned electrical utility assets from the City to FortisBC for a purchase price of $55 million plus applicable taxes and adjustments; C. Section 28(4) of the Community Charter requires that the sale of the City’s electrical utility assets be approved by the eligible voting citizens of the City. City Council received electoral assent on Monday, October 29, 2012 for the City to proceed with the Agreement; D. FortisBC proposed that the Application be reviewed through a Streamlined Approval Process as described in Commission Order G‐37‐12; E. FortisBC stated that in order to realize the greatest benefit for all parties to the Transaction, and particularly the customers, the Transaction needs to close by March 31, 2013; . . . /2 BRITISH COLUMBIA UTILITIES COMMISSION 2 ORDER NUMBER C‐4‐13 F.
The Regulatory Timetable included: •
•
•
Two rounds of Information Requests from the Commission and Interveners; A Procedural Conference; A three‐day Oral Hearing held in Vancouver on February 19‐21, 2013, which included Oral Final and Reply Arguments; G. FortisBC submits that the Commission should approve the entire purchase price of $55 million plus an expected $0.5 million of closing costs for addition into the rate base of FortisBC; H. FortisBC states that if the Transaction is approved, there will be a resulting customer benefit of $1.98 million in 2013 (Customer Benefit), which FortisBC proposes to record in a deferral account and to seek disposition of in its 2014 Revenue Requirements Application. The Customer Benefit is made up of the following: •
The incremental retail revenues that would be collected from City customers now being served under FortisBC’s electrical tariff, minus the wholesale revenues previously collected from the City by FortisBC; • Any incremental cost of service to serve the City customers as retail customers of FortisBC; • Additional minor cost adjustments resulting from FortisBC’s direct ownership of the City’s electrical utility assets; I. As at December 31, 2011 the City’s audited financial statements showed its electrical utility capital assets to be valued at $29.2 million, plus construction work in progress of $3.7 million; J. Some Interveners submitted that the amount to be entered into rate base should be limited to the value of the City’s electrical utility assets as shown in the City’s audited December 31, 2011 financial statements, with an allowance for subsequent actual capital additions less any applicable depreciation; K. FortisBC stated that if net book value is to form the basis of the amount to be allowed into rate base, then the absolute minimum net book value to be included in rate base should be $43.6 million, which is deemed to represent the absolute minimum net book value had the City always been subject to rate regulation; L. Some Interveners also submitted that the Transaction should instead be reviewed under section 52 and/or 53 of the Act, since they consider the Transaction a merger or amalgamation between FortisBC and the City’s electrical utility; M. In reply, FortisBC submitted that the City’s electrical utility is not a person, the Transaction is not a merger or acquisition and that section 45 is the appropriate section under which to consider the purchase of the assets; N. On February 21, 2013, FortisBC asked for a decision from the Commission Panel by March 1, 2013; O. The Commission has reviewed the Application, considered the evidence and the submissions and finds that FortisBC’s purchase of the City’s electrical utility assets as described in the Agreement is in the public interest and that a CPCN should be granted for the Transaction, subject to the conditions as set out in this Order. . . . /3 BRITISH COLUMBIA UTILITIES COMMISSION 3 ORDER NUMBER C‐4‐13 NOW THEREFORE pursuant to sections 45 and 46 of the Act and with reasons to follow, the Commission orders that: 1. A Certificate of Public Convenience and Necessity is granted for the Transaction, subject to the conditions as set out in Directives 2 through 10 of this Order. FortisBC is to confirm acceptance of the conditions through a compliance filing by March 31, 2013. 2. FortisBC must calculate the amount of the purchase price allowed into rate base as follows: a. Begin with the capital asset value and construction work in progress of $29.2 million and $3.7 million, respectively, as per the City’s audited December 31, 2011 financial statements; b. Add actual 2012 capital additions of $4.1 million, minus a full year of depreciation of $1.1 million; c.
3.
4.
5.
6.
7.
8.
9.
Add estimated 2013 first quarter capital additions of $1.4 million, minus first quarter depreciation of $0.3 million. The 2013 first quarter capital additions and first quarter depreciation expense are to be adjusted to actual. FortisBC may include in rate base the estimated 2012 assessed value of the land of $0.7 million. The difference between the purchase price and the sum of the amounts from Directives 2 and 3 is to be treated as an acquisition premium which is to the account of the shareholder. FortisBC must establish a non‐rate base deferral account to capture the 2013 Customer Benefit resulting from the Transaction. The Customer Benefit deferral account shall accrue short‐term interest at FortisBC’s approved 2013 short‐term interest rate of 3.48 percent. FortisBC must seek disposition of the deferral account in its 2014 Revenue Requirements Application. FortisBC must advise the Commission within 2 business days of the Transaction receiving final approval of its Board of Directors, which is required for the completion of the Transaction. FortisBC must begin billing customers currently served by the City on the appropriate FortisBC rate schedule as soon as practicable after the completion of the Transaction. FortisBC must establish a non‐rate base deferral account to capture closing, regulatory process and legal costs up to a maximum of $0.5 million. The deferral account shall accrue short‐term interest at FortisBC’s approved 2013 short‐term interest rate of 3.48 percent. FortisBC must seek disposition of the deferral account in its 2014 Revenue Requirements Application. The rate currently charged by the City to Tolko Industries Ltd. is set as an interim rate to be charged pending a further determination after the Transaction has been approved by the Board of Directors of FortisBC. .
. . . /4 BRITISH COLUMBIA UTILITIES COMMISSION 4 ORDER NUMBER C‐4‐13 10. FortisBC’s request for an increase to the 2013 base revenues for revenue flow‐through mechanism purposes is approved subject to a compliance filing which incorporates all of the above adjustments. DATED at the City of Vancouver, in the Province of British Columbia, this 1st day of March 2013. BY ORDER Original signed by: D.M. Morton Commissioner ORDERS/C‐4‐13_FBC_Purchase of Utility Assets‐Kelowna CPCN APPENDIX A
to Order C-4-12
IN THE MATTER OF
FORTlsBC INC.
ApPLICATION FOR A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY
FOR THE PURCHASE OF UTILITY ASSETS OF THE CITY OF KElOWNA
REASONS FOR DECISION
March 26, 2013
BEFORE:
D.M. Morton, Panel Chair/Commissioner
A.A. Rhodes, Commissioner
B.A. Magnan Commissioner
FBC-CPCN Purchase of Utility Assets of the City of Kelowna
APPENDIX A
to Order C-4-12
TABLE OF CONTENTS
Page No.
EXECUTIVE SUMMARY ••••••.•.•••••••.••••.••••.••.•.•••..•.•••••••.••.•.•.•.•••.••••••.•.•••.•.•.•••••.••.••.•••••••••••.••.•.••••••••...•••1
1.0
INTRODUCTION
1
2.0
PROCEDURAL BACKGROUND
1
3.0
ISSUES
2
3.1
3.2
3.3
3.4
3.5
4.0
Jurisdiction of the Commission
2
3.1.1
Utilities Commission Act, sections 45 and 46
2
3.1.2
3
CPCN Considerations
7
3.2.1
Public Interest
7
3.2.2
Public Consultation
8
3.2.3
Cost-Effectiveness and Rate Impact..
8
3.2.4
Other Considerations
10
3.2.4.1 British Columbia's Energy Objectives
3.2.4.2 FortisBC's Most Recent Long-Term Resource Plan
3.2.4.3 Sections 6 and 19 of the Clean Energy Act
Amount to be Included in Rate Base
l0
10
11
3.3.1
11
3.3.2
Negotiated Purchase Price
12
3.3.3
Net Book Value
13
3.3.4
Capitalized Overhead
13
3.3.5
Tangible Capital Asset Expenditures
13
3.3.6
Land
14
3.3.7
Intervener Submissions
14
3.3.8
Fortis Reply
15
Deferral Accounts
11
17
3.4.1
Deferral Account Treatment of Rate Differentials
17
3.4.2
Revenue Variance Deferral Account
17
3.4.3
Legal Regulatory and Closing Costs
18
Tolko Power Purchase Agreement
SUMMARY OF DIRECTIVES
18
19
APPENDIX A
to Order C-4-12
Page i of ii
EXECUTIVE SUMMARY
On November 13, 2012, FortisBC Inc. (FortisBC) applied for a Certificate of Public Convenience and Necessity
(CPCN) for an extension to its distribution system. This extension results from the proposed purchase of the
City of Kelowna's (the City's) electricity distribution assets (the Transaction). FortisBC also seeks an order
including the impact of the Transaction in its revenue requirements. By Order C-4-13 dated March 1, 2013
the Commission found, with reasons to follow, that the application is in the public interest and that a
certificate should be granted for the Transaction, subject to certain conditions set out in the Order. Order C4-13 also approved the inclusion of $37.7 million in FortisBC's rate base.
If FortisBC accepts the conditions in the Order, approximately 15,000 residential, commercial and
institutional customers in central Kelowna, who currently receive service under the City's Bylaw 7639, will
become customers of FortisBC and subject to billing under FortisBC's Electric Tariff NO.2.
The Panel does not accept the inclusion into FortisBC's rate base of the entire $55 million purchase price
plus applicable taxes and adjustments. Rather, it directs FortisBC to calculate the amount to be included in
rate base as follows: the net book value of the City's utility assets, including construction work in progress,
as stated in the City's 2011 year-end financial statements, plus actual 2012 capital additions net of
depreciation expense, plus first quarter 2013 capital additions net of depreciation expense plus the land
purchase of $0.7 million. The amount that the Panel approves for inclusion in rate base resulting from this
formula is $37.7 million. The Panel considers the difference between the $55 million and the $37.7 million
as a premium for the account of the shareholder.
With regard to the estimated $0.5 million closing, legal and regulatory process costs, the Panel directs
FortisBC to record these costs, up to a maximum of $0.5 million, in a non-rate base deferral account. The
deferral account shall accrue interest at FortisBC's approved 2013 short-term interest rate of 3.48 percent.
FortisBC is directed to apply for disposition of the deferral account as part of its 2014 Revenue
Requirements Application.
Should the Transaction proceed, there will be additional net revenues collected in 2013. The additional net
revenues result from the difference between the incremental retail revenues that will be collected from City
customers (who will be directly served under FortisBC's electrical tariff) and the wholesale revenues
previously collected by FortisBC from the City, less any incremental cost to serve the City customers as retail
customers.
The Panel directs FortisBC to record the additional net revenues in a non-rate base deferral account accruing
interest at FortisBC's approved short-term interest rate of 3.48 percent. FortisBC is directed to apply for
disposition ofthis deferral account as part of its 2014 Revenue Requirements Application.
The Panel accepts FortisBC's request to increase the 2013 base revenues for the purpose of revenue flowthrough; however, it directs FortisBC to include the increase as directed as part of a compliance filing, which
includes all of the other aforementioned adjustments, to be filed with the Commission no later than
March 31, 2013.
APPENDIX A
to Order C-4-12
Page ii of ii
The Industrial Consumers Group/Zellstoff Celgar Limited Partnership and the BC Seniors and Pensioners
Organization (BCSPO) argued that the application should be brought under section 52 or 53 of the Utilities
Commission Act 1 (Act/UeA), rather than section 45. The Commission Panel rejected this approach, finding
that section 45 is the applicable section of the UCA.
The Industrial Consumers Group/Zellstoff Celgar also sought to include issues related to the potential terms
of FortisBC's service agreement with Tolko Industries Ltd. (Tolko) within the scope of this proceeding. They
argued that if the Transaction proceeds, Tolko will become a direct customer of FortisBC and issues relating
to the treatment of the sale of self-generation by different customers, and specifically Tolko, could arise. As
these issues will come into play only if the Transaction proceeds, further submissions will be sought on these
issues at that time, if necessary. Accordingly, the rate currently charged by the City to Tolko is set as an
interim rate to be charged pending a further determination if the Transaction is to proceed.
FortisBC has until March 31, 2013 to file a compliance filing confirming its acceptance of the conditions set
out in Directives 2 through 10 of Order C-4-13.
1
RSBC
c.473
APPENDIX A
to Order C-4-12
Page 1 of 20
1.0
INTRODUCTION
By Order C-4-13 dated March 1,2013 and made pursuant to sections 45 and 46 of the Act the Commission
found, subject to issuance of these reasons, that the application by FortisBC Inc. for a Certificate of Public
Convenience and Necessity (CPCN) for an extension to FortisBC's distribution system resulting from the
purchase of the City of Kelowna's (City) electrical distribution system assets and for an order including the
impact of the Transaction in its revenue requirements (the Application) is in the public interest. The Order
granted a CPCN granted for the Transaction subject to certain conditions set out in the Order, including the
condition that only the net book value as determined by the Commission Panel be included in FortisBC's rate
base.
FortisBC is an investor-owned utility engaged in the generation, transmission, distribution and bulk sale of
electricity in the southern interior region of British Columbia. It has 162,000 direct and indirect customers.
It has assets of approximately $1.3 billion, including four hydroelectric generating plants and approximately
7,000 kilometers of transmission and distribution lines (Exhibit B-1, p. 11).
One of FortisBC's customers is the City of Kelowna. The City operates an electrical distribution system only,
purchasing electricity at wholesale rates from FortisBC, and reselling it at retail rates to its approximately
15,000 customers. The area served by the City's electrical distribution system covers only approximately
one third of the broader municipality, the rest of which is served directly by FortisBC. The rates charged by
the City utility are generally aligned with those charged by FortisBC, although not identical, and have
resulted in a profit of approximately $2.1 million per annum (Exhibit B-1, Appendix D, Kelowna Consultation
Materials, p. 4).
The electrical distribution system is operated as a department of the City and is treated as an asset with the
capital values contained in a City fund account. The sale has been approved by the City's electorate, as
required by law. If FortisBC accepts the conditions in the Order, approximately 15,000 residential,
commercial, institutional and industrial customers in central Kelowna, who currently receive service under
the City's Bylaw 7639 will become customers of FortisBC and be subject to billing under FortisBC's Electric
Tariff No.2 (Exhibit B-1, p. 1).
2.0
PROCEDURAL BACKGROUND
The following parties intervened in the proceedings:
•
•
•
•
•
•
Tolko Industries Ltd. (Tolko);
British Columbia Pensioners and Seniors Organization, BC Coalition of People with Disabilities,
Counsel of Senior Citizens Organization of BC and the Tenant Advisory Center (BCPSO);
Industrial Customers Group (ICG);
B.C. Sustainable Energy Association and the Sierra Club of British Columbia (BCSEA);
Zellstoff Celgar Limited Partnership (Zellstoff Celgar); and
British Columbia Hydro and Power Authority (BC Hydro).
ICG and Zellstoff Celgar were both represented by the same counsel. For ease of reference they are
subsequently referred to as ICG/Celgar in these Reasons.
APPENDIX A
to Order C-4-12
Page 2 of 20
This matter proceeded by way of a three day Oral Hearing, following a Procedural Conference and two
rounds of Information Requests. The potential issue of whether there could be rate discrimination if and
when certain customers of Kelowna, that generate electricity for sale to Kelowna and, become customers of
FortisBC, become direct customers of FortisBC was severed and will be determined by way of further
process, if necessary.
FortisBC requested an expedited decision, as the anticipated elimination of the Harmonized Sales Tax (HST)
in British Columbia and its replacement with Goods and Services Tax (GST) and Provincial Sales Tax (PST) at
the end of March, 2013, will affect the taxes ultimately payable on the transfer of assets and hence, on the
cost of the Transaction.
3.0
ISSUES
The first issues for determination by the Commission Panel relate to:
•
•
the source of the Commission's jurisdiction under the UCA to review the Transaction; and
whether the Transaction should be approved.
Should the Transaction be approved, the Panel must also determine:
•
•
•
•
3.1
the amount of the purchase price to be included in the FortisBC rate base;
the treatment of net new additional revenues from the new customer base; and
rates to be charged to the utility customers formerly served by the City; and
whether the use of deferral accounts as proposed by FortisBC, for costs incurred for this
purchase regarding closing, legal and regulatory expenditures, are appropriate.
Jurisdiction of the Commission
3.1.1
The Application was filed pursuant to sections 45 and 46 of the Act. Those sections relate to the
requirement for a public utility to obtain a CPCN prior to commencing the construction or operation of a
public utility plant or system, or an extension of either. The sections are provided in their entirety in an
Attachment to these Reasons for Decision.
APPENDIX A
to Order C-4-12
Page 3 of 20
3.1.2
Both ICG/Celgar and BCPSO argue that FortisBC should have filed the Application pursuant to section 52 or
53 of the Act. ICG/Celgar submit that the appropriate approach to the statutory interpretation of these
sections is found in ATCa Gas and Pipelines Ltd. v. Alberta 2, (Energy and Utilities Board) 2006 SCC 4,which
nd
states at paragraph 37, referencing E.A. Driedger's Construction of Statutes (2 ed. 1983), at p. 87:
"Today, there is only one principle or approach, namely the words of the Act are to be read in their
entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act,
the object of the Act, and the intention of Parliament."
Sections 52 and 53 of the Act state as follows:
Section 52
Restraint on disposition
52 (1) Except for a disposition of its property in the ordinary course of business, a public utility must
not, without first obtaining the commission's approval,
(a) dispose of or encumber the whole or a part of its property, franchises, licences, permits,
concessions, privileges or rights, or
(b) by any means, direct or indirect, merge, amalgamate or consolidate in whole or in part
its property, franchises, licences, permits, concessions, privileges or rights with those of
another person.
(2) The commission may give its approval under this section subject to conditions and
requirements considered necessary or desirable in the public interest.
Section 53
Consolidation, amalgamation and merger
53 (1) A public utility must not consolidate, amalgamate or merge with another person
(a) unless the Lieutenant Governor in Council
(i) has first received from the commission a report under this section including an opinion
that the consolidation, amalgamation or merger would be beneficial in the public
interest, and
(ii) has, by order, consented to the consolidation, amalgamation or merger, and
(b) except in accordance with an order made under paragraph (a).
(2) The Lieutenant Governor in Council may, in an order under subsection (1) (a), include
conditions and requirements that the Lieutenant Governor in Council considers necessary or
advisable.
(3) An application for consent of the Lieutenant Governor in Council under subsection (1) must be
made to the commission by the public utility.
(4) The commission must inquire into the application and may for that purpose hold a hearing.
(5) On conclusion of its inquiry, the commission must,
(a) if it is of the opinion that the consolidation, amalgamation or merger would be beneficial in
the public interest, submit its report and findings to the Lieutenant Governor in Council, or
(b) dismiss the application.
2
A Tea Gas and
Ltd. v. Alberta
and Utilities
SCC 4
APPENDIX A
to Order C-4-12
Page 4 of 20
(6) If a public utility gives notice to its shareholders of a meeting of shareholders in connection
with a consolidation, amalgamation or merger, it must
(a) set out in the notice the provisions of this section, and
(b) file a copy of the notice with the commission at the time of mailing to the shareholders.
ICGjCelgar submit that using a simple grammatical interpretation of 52(1)(a) and (b), the reference to public
utility must be to FortisBC. Accordingly, section 52(1) should be read: "FortisBC shall not dispose of assets
without Commission approval, except in the ordinary course of business." ICG also maintains that the
section also must be interpreted to say that " ...a public utility cannot purchase from any other person."
(T1:24-25)
With regard to the terminology 'merge, amalgamate or consolidate,' which is incorporated in both
3
sections 52(1)(b) and 53(1), ICGjCelgar cite R. v. Black & Decker Manufacturing Co. which states at
page 420:
"T: "The word 'amalgamation' is not a legal term and is not susceptible of exact definition ... The
word is derived from mercantile usage and denotes, one might say, a legal means of achieving an
economic end. The juridical nature of an amalgamation need not be determined by juridical criteria
alone, to the exclusion of consideration of the purposes of amalgamation. Provision is made under
the Canada Corporations Act and under the Acts of the various provinces whereby two or more
companies incorporated under the governing Act may amalgamate to form one corporation.... The
purpose is economic: to build, to consolidate, perhaps to diversify, existing businesses; so that
through union there will be enhanced strength. It is a joining offorces and resources in order to
perform better in the economic field."
ICGjCelgar also cite the definition of "merger" found in Black's Law Dictionary:
"The absorption of one company by another, latter retaining its own name and identity and
acquiring assets, liabilities, franchises and powers of former, and absorbed company ceasing
to exist as separate business entity." (T1:27)
ICGjCelgar submit that amalgamation is not defined under the UCA for very good reasons, namely the
intention of the legislature to create very broad powers to the Commission with respect to the review of
mergers, amalgamations, and consolidations. In its view, the words "merge, amalgamate, or consolidate" in
section 52(1)(b) should be given the broadest interpretation. In support of its position, it cites the
Commission's decision in the case of the acquisition of Princeton Light and Power by Fortis Inc. 4 (T1:26).
ICGjCelgar also argue that although the City is not a public utility, as that term is defined in the Act, it is
nevertheless a utility. Further, it submits the Transaction marks the end of that utility, with FortisBC
assuming the obligation to serve its customers. ICGjCelgar submit that this circumstance is contemplated in
section (52)(1)(b) (T4:587).
With regard to section 53, ICGjCelgar submit that in this case there is a public utility, FortisBC, "by any
means direct or indirect, merging, amalgamating or consolidating with another person." (T4:586).
3[1975]1 5.C.R. 411
In the Matter of an application by Princeton Light & Power Company Ltd. and An Application by Fortis Inc., Fortis West Inc. and
Fortis
Order
2005.
4
APPENDIX A
to Order C-4-12
Page 5 of 20
The BCPSO agrees. Additionally, in its view, there is no requirement that the parties to a merger be
corporations or that the merge retain any control over the assets that were purchased. BCSPO relies on the
definition of merger found in the "Free Online Dictionary":
"The union of two or more commercial interests ar corparations." (T4:606)
BCSPO further states that "section 53 does not, in our submission, based upon the wording of the section,
contemplate only the consolidation, amalgamation or merger of two publicly regulated utilities". In its view,
the phrase "a public utility must not consolidate, amalgamate or merge with another person" should not be
interpreted only to read: "a public utility must not consolidate, amalgamate or merge with another public
utility" as BCSPO submits FortisBC is doing. The BCPSO submits that the Kelowna utility is a 'person' as that
term is used in section 53. Accordingly, in its view, the Transaction " ... is clearly covered by section 53."
(T4:607-608)
In FortisBC's view, when considering sections of the UCA, headings should be taken into account. It is of
some note, it submits, that section 52 as a whole is headed "Restraint on Disposition." In this regard, the
public utility that is the subject of section 52, which in this case is FortisBC is not contemplating any
disposition of assets. FortisBC further submits that while not determinative, headings may be consulted in
interpreting statutory provisions. In support of its position, it cites Professor Ruth Sullivan's textbook,
Statutory Interpretation/ which states that there is a tendency to treat headings as an integral part ofthe
context, to be relied on like any other contextual feature, even in provinces like British Columbia where the
Interpretation Act seems to point to a contrary result (Exhibit B-21, p. 8).
With regard to the provisions of section 52, FortisBC submits that they " ... relate to the potential
diminishment of the assets of a utility already subject to the jurisdiction of the Commission, or to the
potential diminishment of control over assets already regulated by the Commission. Those issues simply do
not arise in this case, where FortisBC is acquiring assets not currently subject to Commission jurisdiction." It
goes on to say that this situation differs from prior cases under section 52 of the UCA. In none of these
cases was a municipality the selling entity; such sellers are already subject to a specific statutory regime
governing disposition of assets of the kind (Exhibit B-21, pp. 4, 6-7).
Regarding section 53, FortisBC replies that these sections are not applicable as the City is not a public utility
and its electricity distribution business is not a "person" as that term is used in section 53. Further, it
submits that there will be no amalgamation or merger with the City should the Transaction be completed. It
is a disposition of assets by the City of Kelowna and a purchase of them by FortisBC - straightforward
commercial concepts that the legislature could easily have captured by using those very terms in section 53
rather than resorting to words that mean something else (T4:497-502, Exhibit B-21, p. 9).
With regard to Princeton Light and Power, FortisBC noted that it applied for approval of the disposition of
shares to Fortis Inc., which would create a reviewable interest under section 54 of the UCA (Exhibit B-21,
p.36).
5
nd
Ruth Sullivan, Statutory Interpretation, 2
ed. (Toronto: Irwin Law, 2007) at pp. 142-143.
-'---'----'-'-----------------
APPENDIX A
to Order C-4-12
Page 6 of 20
Commission Determination
The Commission Panel agrees with FortisBC that sections 45 and 46 provide the relevant jurisdiction for the
Commission to review the Transaction. The Commission Panel notes that section 45 contemplates the
extension of a public utility system, which would be the end result of the Transaction. The Commission
Panel agrees that section 45 does not specifically refer to the purchase of assets, but, given that the
Transaction will cause FortisBC to extend its system, the Panel finds this section to be the most appropriate
in this instance.
The Commission Panel is of the view that, consistent with its heading, "Restraint on Disposition,"
section 52(1)(a) relates to the need for Commission approval prior to the disposition of public utility
property by a public utility, other than in the ordinary course of its business. In this case, the City is not a
public utility, as defined by the Act, and it is the City that is disposing of its electrical utility assets. In this
regard, the Commission Panel adopts the statement on the use that can be made of statutory headings
found in Professor Sullivan's "Statutory Interpretation and relied upon by FortisBC" to the effect that
recently, "there is a tendency to treat headings as an integral part of the context, to be relied on like any
other contextual feature."G
Section 52(1)(b), is also qualified by the introductory words in section 52(1):
"52(1) Except for a disposition of its property in the ordinary course of business, a public
utility must not, without first obtaining the commission's approval,
(b) by any means, direct or indirect merge, amalgamate or consolidate in whole or in part its
property, franchises, licences, permits, concessions, privileges or rights with those of
another person."
The Panel agrees with ICG/Celgar that this section must also be accorded its plain meaning, viewing the
words in their ordinary and grammatical sense, in harmony with the legislative framework within which the
provision is found. The Panel finds that section 52, in its entirety, relates to the disposition of property by a
public utility, by any means, including merger, amalgamation, etc. The City of Kelowna, which is the party
disposing of its assets, is not a public utility, and section 52 is therefore not applicable to the Transaction.
The Panel also finds that section 53, is not relevant. That section states, in part, that a "public utility must
not consolidate, amalgamate or merge with another person" without the consent of the Lieutenant
Governor in Council. In section 53, FortisBC is the only public utility involved. The Panel agrees with
FortisBC that the electrical utility assets of the City are not a "person" under section 53. The Panel further
finds that, even viewing the proposed object of the purchase as being the electrical distribution utility
business of the City, complete with customers, will not serve to make the utility or business a "person" as
required by the section. The Panel notes the definition of "person" in the Interpretation Act/ which
"includes a corporation, partnership or party, and the personal or other legal representatives of a person to
whom the context can apply according to law" would appear to contemplate some form of legal entity, as
opposed to the somewhat amorphous concept of a business or assets with no other separate status.
6
7
Ibid. at pp. 142-143.
RSBC
c. 238
APPENDIX A
to Order C-4-12
Page 7 of 20
As noted, the operations of the City's electrical distribution system are conducted as if a department within
the structure of the City. There is no separate legal entity or {person' as the term is used in section 53 of the
Act. The Panel will therefore consider whether a CPCN should be granted for the Transaction, as applied for
by FortisBC.
The Commission Panel notes that section 45 contemplates the extension of a public utility system, which
would be the end result of the Transaction. The Commission Panel agrees that section 45 does not
specifically refer to the purchase of assets, but, given that the Transaction will cause FortisBC to extend its
system, the Panel finds this section to be the most appropriate in this instance.
3.2
CPCN Considerations
The Panel finds that the Transaction is consistent with the public interest when viewed in terms of criteria
including continuity of service, safety and reliability as well as specific considerations relating to British
Columbia's energy objectives and consistency with FortisBC's long-term resource plan.
However, the Panel does not accept that the modest rate reductions put forward by FortisBC, based on an
addition to its rate base of $55 million, will necessarily be achieved, and, if so, that they will be permanent.
The Panel agrees with the ICG that the time frame modelled is short, and that some of the rate reduction
benefit is due to timing. For example, FortisBC has assumed it will not need to pay property taxes in 2013.
3.2.1
Public Interest
FortisBC submits that the Transaction is in the public interest, although it acknowledges that there is no
precise definition of what comprises the tipublic interest". It submits, however, that the Transaction at the
agreed purchase price of $55 million is in the public interest and proposes a number of criteria which it
submits should be considered by the Commission in making its determination of the public interest. Its
proposed criteria are:
•
•
cost-effectiveness;
reliability of service;
•
•
•
•
safety;
rate impact;
key risks associated with the acquisition; and
socio-economic considerations. (Exhibit B-21, pp. 14-15)
FortisBC describes the criteria other than safety and reliability, basically in terms of what it describes as the
tipositive effect on rates" for all its customers. It describes the key risk of the Transaction as the risk that the
Transaction will not proceed, such that the rate benefit being put forward will not be achieved. It further
argues that the Transaction precludes the possibility of it building duplicative infrastructure in order to
extend its services to the area of the City which it does not currently serve and is presently served by the
City.
Commission Panel Determination
The Commission Panel will review the reliability of service and safety as a public interest consideration
separately from the project risk and economic considerations associated with the acquisition.
APPENDIX A
to Order C-4-12
Page 8 of 20
In the Panel's view, there are no negative implications from the Transaction in terms of safety or
reliability of service. FortisBC Pacific Holdings Inc., which is FortisBC's non-regulated affiliate, has been
providing planning, maintenance and operations services under contract with the City for over a decade.
FortisBC itself is an experienced electrical utility services provider in the region. As a public utility, it is
required to maintain its property and equipment in a condition that enables it to provide adequate, safe,
efficient service to the public at just and reasonable rates. The FortisBC service territory is also contiguous
to that of the City. There are no socia-economic concerns as might arise with a new, unknown service
provider from another region.
3.2.2
Public Consultation
FortisBC summarizes its public consultation efforts in Section 4.2 of the Application. FortisBC also provides
the City's public consultation materials in Appendix D of the Application, including a Fairness Opinion issued
by the public accounting firm Deloitte & Touche on the reasonableness of the negotiated purchase price for
the City (the Fairness Opinion).
FortisBC also provided information on the proposed purchase via its website and through its Power/ines
newsletter which is mailed to all FortisBC customers with their bills (Exhibit B-1, p. 15).
The Commission Panel finds that the consultation performed by FortisBC and the City of Kelowna to
inform the customers of the City's utility was adequate. However, the Panel is of the view that
consultation by FortisBC with its own direct customers was not as robust. Although there was
information available on FortisBC's website, a more focussed approach, such as a bill insert specific to the
proposed Transaction, would ensure that customers are fully informed of a transaction that could
potentially have a financial impact on them. The Panel is not persuaded that, in this case, a different
result would have ensued had more and better consultation occurred.
3.2.3
Cost-Effectiveness and Rate Impact
FortisBC states that if the Transaction is approved, there will be benefits through mitigation of future rate
increases for all existing and new FortisBC customers because the incremental cost for FortisBC to provide
service to additional customers (i.e. the City's former customers) will be less than the incremental revenues
collected from those customers. (Exhibit B-1, p. 3) FortisBC further argues that customers will receive a
permanent benefit from the Transaction of an approximate one percent reduction in rates into the future,
assuming the entire purchase price of $55 million is included in rate base and amortized into rates
(Exhibit B-1, p. 8). The cumulative rate increases are estimated to be -1.7 percent for 2014, and -1.1
percent, -1.0 percent and -0.9 percent for the years 2015 through 2017, respectively (Exhibit B-1, p. 22).
FortisBC further states that future rate increases will be mitigated by the economies of scale provided by the
Transaction, and that any future projects or initiatives that have a fixed cost component will be spread over
more customers thereby mitigating rate impacts. Examples of fixed costs include various back office
administrative functions, computer software additions or upgrades, and other projects or initiatives that
have a fixed cost component (Exhibit B-21, p. 25; Exhibit B-2, BCUC IR 1.2.1).
APPENDIX A
to Order C-4-12
Page 9 of 20
ICG/Celgar argue that FortisBC's benefit analysis has only looked at a short time period. They submit, given
the difference in cost structure between the City, which pays neither income nor property taxes and has a
lower cost of capital, and FortisBC, one should not expect long term benefits from the provision of the same
service by FortisBC, particularly in such a capital-intensive industry (T4:591-592).
They also submit that some differences are simply due to timing, as opposed to real benefits, in that
FortisBC is assuming it will not be required to pay property taxes in 2013 and will not commence
depreciating the capital addition from its purchase until 2014, in accordance with its depreciation policy.
("... FortisBC calculates depreciation based on its closing asset balance as at the end ofthe preceding year")
(Exhibit C3-9, pp. 8-9; Exhibit B-1, p. 20).
FortisBC was asked to calculate rate reductions assuming a reduced addition to rate base of $38.8 million.
For this case, the cumulative rate increases due to the purchase range from -2.4 percent in 2014, to
-1.6 percent for 2015 and 2016 and -1.5 percent in 2017. (Exhibit B-2, BCUC IR 1.14.4)
The BCPSO notes the fact that the City estimated it would need to spend in excess of $70 million in new
infrastructure investment in the next 20 years. (City of Kelowna Report to Council, Exhibit B-1, Appendix D,
pp.2-3) In this regard, it submits the benefits to FortisBC are clear: growth of the Company's rate base
through the addition of the City's electrical utility assets and through the anticipated $70 million in future
capital expenditures on those assets. The BCPSO states that in light of the $70 million in estimated future
capital expenditures, it does not believe FortisBC's assertion that there will be a permanent reduction to
customer rates (T4:611).
The Panel finds the key risk associated with the Transaction is not the risk that it will not proceed and that
the rate benefit modelled will be lost, but the risk that it will proceed, and the rate benefits modelled will
not be achieved.
Like the BCPSO, the Panel notes that, according to the City's consultation materials, a recent independent
engineering review suggested that in excess of $70 million will need to be spent on its infrastructure in the
next 20 years. This is a significant expenditure, contemplated to be required over a significantly longer
period than the rate impacts modelled by FortisBC.
In the Panel's view, the assumed rate benefits flowing from this Transaction are not substantial, even when
modelling a smaller addition to rate base than requested by FortisBC. As noted, even assuming a reduced
addition to rate base of $38.8 million, the cumulative rate increases due to the purchase range from -2.4
percent in 2014, to -1.6 percent for 2015 and 2016 and -1.5 percent in 2017. The Panel further notes that
the cumulative benefits decrease with time.
This is particularly the case when the rate reductions of approximately 2 percent, are viewed in light of the
rate increases being contemplated by FortisBC, which have reached 22 percent to 34 percent on a
cumulative basis by 2015 to 2017. This should also be viewed in the context ofthe approximately
$70 million of infrastructure spending required in the next 20 years.
APPENDIX A
to Order C-4-12
Page 10 of 20
Given the modest nature of the rate relief being put forward as a benefit of the Transaction, and the short
time frame modelled together with the significant capital expenditures required to be invested in the
existing infrastructure, the Panel finds that there is a significant risk of these benefits not being realized. The
higher the amount included in rate base, the greater this risk.
3.2.4
Other Considerations
In addition to the other facts the Commission considers in deciding whether to issue a CPCN,
section 46(1)(3.1) of the UeA, requires the Commission to specifically consider:
a.
b.
c.
the applicable of British Columbia's energy objectives;
the most recent long-term resource plan filed by the public utility under s. 44.1, if any; and
the extent to which the application for the certificate is consistent with the applicable
requirements under sections 6 and 19 of the Clean Energy Act,
3.2.4.1 British Columbia's Energy Objectives
British Columbia's energy objectives are set out in the Clean Energy Act. However, section 46(1)(3.1) does
not apply:
" '" if the commission considers that the matters addressed in the application for the
certificate were determined to be in the public interest in the course of considering a longterm resource plan under section 44.1.,,9
The BCSEA supports the Transaction noting that the purchase would result in the City's electrical utility
customers becoming part of FortisBC's residential inclining block. The BCSEA considers this to be "at least a
modest step in the right direction" (T4:580).
In the Panel's view, as the Transaction is, in substance, merely the change in ownership of electricity
distribution assets, British Columbia's energy objectives do not come into play in any major way.
However, FortisBC does have an inclining block residential rate structure, designed to incent conservation,
which will apply to the customers that were formerly customers of the City's electrical utility. Accordingly,
the Panel finds the Transaction is consistent with energy objectives relating to taking demand-side measures
and conserving energy, as set out in section 2(b) of the Clean Energy Act.
3.2.4.2 FortisBC's Most Recent Long-Term Resource Plan
The Commission is also required to consider the most recent long-term resource plan filed by the utility
under section 44.1 of the Act, if any.
FortisBC's most recent Long-Term Resource Plan was filed on June 30, 2011, as part of its 2012 Integrated
System Plan. The Integrated System Plan was filed in conjunction with FortisBC's 2012-2013 Revenue
8
9
SBC 2010, c. 22
s.
APPENDIX A
to Order C-4-12
Page 11 of 20
Requirements Application. The Commission accepted the Long-term Resource Plan, subject to its rejection
of FortisBC's proposal to implement a "Planning Reserve Margin" at that time. lO
In the Panel's view, as FortisBC already serves the customers of the City indirectly, through wholesale sales
to the City, the Transaction is consistent with FortisBC's most recent Long-Term Resource Plan. There is no
anticipated substantial change to either the energy/capacity supply or demand projections flowing from the
Transaction.
3.2.4.3 Sections 6 and 19 of the Clean Energv Act
As noted above, the Commission Panel is required to consider the extent to which the Application is
consistent with the applicable requirements contained in sections 6 and 19 of the Clean Energy Act.
In the Panel's view, only section 6(4) could potentially have any relevance to this Application, as the other
subsections of section 6 do not apply to FortisBC. Section 6(4) requires a public utility to consider British
Columbia's energy objective to achieve electricity self-sufficiency in planning for the construction or
extension of generation facilities and energy purchases in terms of its long-term resource plan. As the
Transaction does not affect the energy/capacity supply or demand projections, there being no new total
customers, but a shift from indirect to direct customers, new generation and energy purchases are not in
issue.
Nor does section 19 relate to FortisBC as it is neither a prescribed utility or in a class of prescribed public
utilities as required by section 19(2)(b) and therefore has no applicability to this Transaction.
The Panel therefore finds no inconsistency as between the Application and sections 6 and 19 of the Clean
Energy Act.
3.3
Amount to be Included in Rate Base
3.3.1
These sections, which can be found in their entirety in the Attachment to these Reasons, relate to the
setting of rates to be charged by a public utility by the Commission. They require the Commission to set
rates that allow a utility a fair and reasonable return on the appraised value of its property. If the
Transaction proceeds, FortisBC will include an additional amount in its rate base and will recover its allowed
return on that amount.
10 In the Matter of an Application by FortisBC Inc. for Approval of 2012-2013 Revenue Requirements and Review of the 2012
Integrated System Plan, Decision and Order G-110-12, August 15, 2012 (2012-2013 RRA/ISP Decision)
APPENDIX A
to Order C-4-12
Page 12 of 20
3.3.2
Negotiated Purchase Price
FortisBC submits that the electrical utility assets should be valued at $55 million, pills applicable taxes and
adjustments, and that this negotiated price represents the negotiated fair market value of the assets
(Exhibit B-1, p. 17).
The Fairness Opinion supported the negotiated purchase price of $55 million in terms of fairness to both the
City's electrical utility ratepayers and its taxpayers (Exhibit B-1, Appendix D).
However, FortisBC did not obtain its own fair market value assessment of the assets from an independent
third party. FortisBC states that the reason it did not obtain its own assessment was because its approach in
negotiating the purchase price with the City was to ensure that the asset purchase price was the best deal
FortisBC could achieve and that the price provided benefits to current and new customers of FortisBC.
FortisBC further submits that the purchase price represents the fair market value of the assets because the
price was negotiated between "two arms length, knowledgeable, willing, and unpressured parties"
(Exhibit B-2, BCUC IR 1.11.1.1.1).
FortisBC further requests that the fair value of the electrical utility assets, represented by the negotiated
purchase price plus transaction costs, be approved to be included in its rate base. FortisBC recognizes that
the Commission has previously refused to allow the difference between the purchase price and the net book
value of purchased assets into rate base; however, FortisBC submits that the purchase of the City's electrical
utility assets is a different circumstance. FortisBC submits that the City's electrical utility assets have never
had a rate base value established, and that customer rates have not recovered the cost of the assets
through depreciation. FortisBC further submits that the net book value of the City's electrical utility assets,
as provided by the City, is not reflective of a regulated utility. (Exhibit B-2, BCUC IR lolLS, 1.11.5.1)
FortisBC submits that "for consistency, the net book value method is ordinarily used for 'standard rate base
determinations1l1 but argues that this method "should not be used exclusively for all rate making
determinations." (Exhibit B-21, p. 21)
FortisBC states that the proposed purchase price of $55 million was the best deal the Company was able to
achieve after approximately one year of negotiations with the City, and that if the Company were only
allowed to recover a net book value amount of the assets in rate base, there would be an erosion of the fair
return on investment for the Company's shareholders (Exhibit B-2, BCUC IR 1.11.5.1).
FortisBC further argues, citing the BC Court of Appeal Decision in Hemlock Valley,ll that a failure to include
the entire $55 million in rate base would result in rates which are unjust and unreasonable as failing to yield
a just and reasonable return on rate base. (T4:519-521)
FortisBC further disagrees with the suggestion that the difference between the purchase price and the total
net book value of the City's assets can or should be characterized as an acquisition premium.
11
Hemlock Valley Electrical Services Ltd. v. British Columbia (Utilities Commission) (1992) 66 B.C.L.R. (2d)l, 1992 Can L11 5959 (CA) at
53-54 and 56.
APPENDIX A
to Order C-4-12
Page 13 of 20
3.3.3
Net Book Value
FortisBC provided the following net book value information from the City as at the end of 2011:
•
•
Net Book Value of electricity distribution assets, excluding land, at December 31, 2011 based on
information provided by the City: $29.2 million;
2011 Construction Work in Progress: $3.7 million (Exhibit B-2, BCUC IR 1.11.3).
FortisBC also provided additional net book value information for 2012 and for Ql 2013:
•
•
•
•
2012 Actual Plant Additions: $4.1 million;
2012 Depreciation: $1.1 million;
Quarter 1,2013 Estimated Plant Additions: $1.4 million;
Quarter 1, 2013 Estimated Depreciation: $0.3 million (Exhibit B-19, Undertakings 7 and 8).
FortisBC argues, however, that should the Commission apply the net book value approach, the net book
value, as set out above, must be increased to reflect the differences in accounting policies used by FortisBC,
as a rate-regulated entity, and the City. These differences are further described in the following sections:
Capitalized Overhead and Tangible Capital Asset Expenditures.
3.3.4
Capitalized Overhead
Capitalized overhead is an allocation of general expenses to capital. Such capitalization may be permitted in
regulated utilities to reflect the fact that some general expenses, although not directly attributable to a
capital project, are nonetheless supportive of capital investment. The capitalized overhead allocation
methodology and rates are specific to an individual company, and are generally determined following a
study undertaken for that purpose.
As noted, FortisBC submits the only approach that results in just and reasonable rates is to allow the full
negotiated purchase price to be included in rate base; however, if the Commission decides to allow only the
net book value of the City's assets into rate base, then FortisBC submits that the net book value must be
adjusted upwards to account for the fact that the City applied public sector accounting policies and
therefore did not increase the value of the assets on its books by capitalizing a portion of its expenses.
FortisBC submits that an appropriate adjustment, based on FortisBC's currently approved capitalization rate
for overhead [of 20 percent] would result in a minimum net book value of approximately $44 million
(Exhibit B-2, BCUC IR 1.11.5.1). In particular, FortisBC states that the use of capitalized overhead is a
standard mechanism within the rate-regulated utility industry due to the capital intensive nature of the
work (Exhibit B-9, BCUC IR 2.6.1).
3.3.5
Tangible Capital Asset Expenditures
Tangible Capital Asset (TCA) expenditures, as the term is used herein, are expenditures which were made by
the City but, pursuant to the City's capitalization policy, are accounted for as expenses because they fall
below the City's capitalization threshold. However similar expenditures might have been capitalized under
FortisBC's capitalization policy.
APPENDIX A
to Order C-4-12
Page 14 of 20
FortisBC submits that TCA expenditures were made by the City on projects that meet the criteria of
capitalization, but because they are below the City's set "threshold limits," they are expensed "for
administrative ... ease" (T3:264). FortisBC further suggests that these TCA expenditures would be capitalized
by a rate-regulated utility such as itself because the costs provide substantial benefits for a period of more
than one year, extend the useful life of an asset or increase the output, and are held for use to conduct
business to generate income (Exhibit B-9, BCUC IR 2.6.1).
FortisBC therefore contends that any calculation of net book value for the City's electrical utility assets
should also include an estimate of the City's TCA expenditures from 2008 to present. FortisBC estimates this
amount to be in the $3.5 million range (Exhibit B-9, BCUC IR 2.6.1; T:3 p. 264).
FortisBC concludes that the minimum net book value of the City's electrical utility assets should include not
only the actual net book value of the assets but also 20 percent of the City's annual Operating and
Maintenance expenses (capitalized, but subject to depreciation) as well as all ofthe City's expenditures on
TeAs (also subject to depreciation).
FortisBC calculates the minimum net book value, based on the above calculations, to be approximately
$45 million (Exhibit B-9, BCUC IR 2.6.1).
3.3.6
Land
The two properties to be purchased as part of the Transaction are located at 1000 Richter Street and 1008
Richter Street in Kelowna, BC These properties are an integral part of the City's electrical distribution
system, as one property is the site for a substation along with an adjacent piece of land. Based on the 2012
assessed values provided by the City, the total value of the land is $747,000, which includes $582,000
assessed for 1000 Richter Street and $165,000 assessed for 1008 Richter Street (Exhibit B-1, Appendix B,
Schedule 1.1(iii), Appendix D, Fairness Opinion, pp. 6,8; Exhibit B-2, Appendix BCUC IR 1.11.2).
The City did not provide any historical cost information for the two Richter Street properties and there was
no value for these properties included in the City's 2011 financial statements.
3.3.7
Intervener Submissions
The BCSEA supports FortisBC's submission that the $55 million purchase price should be allowed into rate
base. The BCSEA submits that the $55 million purchase price is a fair market value for the Transaction
because the price was negotiated between well-informed and professionally advised sophisticated parties,
and that the fair market value is an appropriate value to include in rate base (T4:580-581).
APPENDIX A
to Order C-4-12
Page 15 of 20
ICG/Celgar relies upon Bonbright's textbook, "Principles of Public Utility Rate", to define the original cost of
assets in public utility accounting, which states that the original cost is "the cost of an asset, when first
devoted to the public service rather than the cost to a transferee company.,,12 ICG/Celgar submit that this is
applicable to the acquisition because the City's electrical utility assets have been devoted to the public
service as a City-owned utility and therefore the original cost, less depreciation, of the City's assets should
be allowed into rate base, not the purchase price (T4:593). ICG/Celgar further submit that almost without
exception, past Commission decisions have determined that the difference between the amount the
purchaser pays and the original cost less depreciation is to be borne by the shareholder (T4:594).
ICG/Celgar submit that if the Commission approves the purchase, the amount that should be included in
rate base is the net book value of the capital assets and the construction work in progress as stated on the
City's 2011 audited financial statements, plus actual capital additions (less depreciation) incurred between
the year-ended 2011 and the purchase closing (T4:599).
ICG/Celgar disagree with FortisBC that capitalized overhead and TCA expenditures should be added to the
net book value because this will result in customers paying twice for these items. The TCA expenditures and
the O&M which capitalized overhead would be based on have already been expensed by the City, which
means that the City's customers have already paid for these expenses (T4:600).
The BCPSO states that it accepts and adopts ICG/Celgar's view of what should be included in rate base if the
Transaction is approved (T4:617).
3.3.8
Fortis Reply
FortisBC argues that concerns over double payment for the same utility assets that may arise where the
vendor is a business entity distinct from its customers do not arise where the vendor and the customer are
one and the same, and that this is the basic situation here. It argues that the reasoning of the Alberta
Utilities Commission in FortisAlberta Inc., 2010-2011 Distribution Tariff - Phase I, AUC Decision 2010-309
should be applied (T4:548-550). In that case, FortisAlberta sought to include the full purchase price for four
"Rural Electrification Associations" (REAs) in its rate base. The Utility Consumers Advocate, an intervener,
argued that to allow the full purchase price into rate base would cause the customers of the REAs to pay
twice for the REA assets. The Alberta Utilities Commission rejected this argument, observing that the
proceeds of the sale would be distributed to the members of the disbanded REAs, which would address any
concerns regarding double payment.
The Panel does not approve the inclusion of the full $55 million negotiated purchase price in the rate
base. The Panel does approve the following:
•
The Net book value of the electricity distribution assets (excluding land) as at December 31,
2011 of $29.2 million;
The 2011 Construction Work in Progress of $3.7 million;
•
•
•
2012 actual Plant additions of $4.1 million;
2012 Depreciation of $1.1 million;
Quarter I, 2013 estimated Plant Additions of $1.4 million, adjusted to actual;
•
12
James C.
Albert L.
David R.
APPENDIX A
to Order C-4-12
Page 16 of 20
•
•
Quarter I, 2013 estimated Depreciation of $0.3 million, adjusted to actual;
Land valued at $0.7 million.
The assets being purchased that are approved to be included in rate base, as cited above, total
$37.7 million.
The Panel rejects the inclusion of both Capitalized Overhead and TCA expenditures in net book value. The
Panel finds that the City's electrical utility customers have already paid for these expenditures through their
rates, as the City expensed these outlays rather than capitalizing them through the use of capitalized
overhead or TCA expenditures. Having past years' deemed Capitalized Overhead and TCA expenditures
included in the rate base would mean the existing City electrical utility customers would be paying twice for
these expenditures.
Although ratepayers of the former utility receive some benefit from the full purchase price to the City, the
purchase price is not being returned specifically to those ratepayers, as was the case in the Alberta decision
discussed above. Rather, the purchase price will be paid to the City as a whole, which, generally speaking,
represents its property taxpayers and not the ratepayers of its electric utility. In the Alberta case, the group
being asked to pay twice was the identical group being compensated. This situation can be characterized as
past expenses being refunded in part, and then re-characterized, and subsequently charged to existing and
new FortisBC customers, most of whom did not benefit from the initial expenditures.
The Panel further rejects the argument that the City's rates are not analogous to cost of service rates. The
City maintained books of account for its electricity distribution assets, and recovered a sufficient amount in
rates, which were based on those charged by FortisBC, to recover its costs plus earn a profit. The Panel
views an inclusion of these expenditures as a "write-up" of the net book value of the acquired assets. The
Panel therefore rejects the FortisBC approach since it represents more than a fair and reasonable charge
under section 59(5) of the Act.
FortisBC argues that $55 million is a negotiated purchase price and represents the fair market value of the
assets. The Panel finds that although there may be a sophisticated seller and a sophisticated buyer, with the
seller seeking to maximize the purchase price, the buyer's behaviour may have different motivations tha n
the usual case with arms' length parties. The Panel is of the view that, while the purchaser has some
incentive to negotiate a reduced price, it isn't necessarily incented to minimize the price. In this case, the
buyer seeks to recover 100 percent of its negotiated purchase price from its ratepayers, together with a
return on the entire expenditure. Thus any price that that provides some benefit to ratepayers could be
viewed as satisfactory. This situation is different from a situation where the buyer seeks the lowest price
and the seller the highest price for an asset. The same motivations are absent.
For the foregoing reasons, the Panel considers that the City's assets have been devoted to utility service and
finds no reason to deviate from the usual method of determining a rate base. The Panel also notes, for
example, the assurance provided by Fortis Inc. in its application to the Commission to purchase the shares of
the Terasen Utilities, that "[t]he acquisition premium will not be recovered from Terasen Utilities
customers" and that "none of the fees incurred in connection with the Transaction and Acquisition
B
Agreement will be recovered from Terasen Utilities' customers."
13
In the Matter of on Application by Fortis Inc. for Approval of the Acquisition of the Issued and Outstanding Shares of Temsen Inc.,
Decision and Order G-49-07, April 30, 2007; Decision, p. 13.
APPENDIX A
to Order (-4-12
Page 17 of 20
With regard to the Hemlock Valley decision, the argument advanced by FortisBC equates the potential
investment of FortisBC with its rate base, which does not follow. Once the amount to be included in rate
base is determined by the Commission Panel, FortisBC has the option to either proceed with the Transaction
as approved, or decline to proceed. The Commission Panel is not forcing FortisBC to accept any particular
rate of return. Rates will be set to provide a reasonable return on rate base, whatever that rate base may
be determined to be. As noted in Hemlock Valley/4 " a rate is unjust or unreasonable if it fails to yield a just
and reasonable return on rate base."
The Commission Panel considers the difference between the negotiated price of $55 million and the
approved amount of $37.7 million to be included in rate base as a premium for the account of the
shareholder, should the Transaction proceed. FortisBC is directed to confirm acceptance of this condition
by March 31, 2013.
3.4
Deferral Accounts
3.4.1
Deferral Account Treatment of Rate Differentials
FortisBC states that a rate reduction of an estimated $1.98 million, based on the acceptance of the
$55 million negotiated purchase price, is made up of the following:
•
•
•
The incremental revenues that would be collected from the City's customers who will be served
under FortisBC's electrical Tariff, minus the wholesale revenues previously charged to the City
by FortisBC;
The incremental cost to serve the City customers as retail customers of FortisBC; and
Additional minor cost adjustments resulting from FortisBC's direct ownership of the City's
electrical utility assets (Exhibit B-1, pp. 18-22; Exhibit B-2, BCUC IR 1.6.1).
FortisBC indicates that customers will not feel the rate impact from the Transaction for 2013 as those rates
have already been set. Any benefit to customers will be deferred until 2014. FortisBC proposes to record
the $1.98 million over-collection of 2013 rates in a deferral account for disposition in its 2014 RRA, to
mitigate customer rate increases in that year. (Exhibit B-1, p. 20; Exhibit B-3, BCPSO IR 1.4.1)
3.4.2
Revenue Variance Deferral Account
FortisBC indicates that the total Revenue Requirement in 2013 will include incremental revenues that will be
collected from the City's customers who will be charged under FortisBC's electrical Tariff following the
closing of the Transaction. FortisBC requests an increase in the base amount of revenues for calculating its
Revenue Variance Deferral Account by $6.798 million to account for the incremental revenue. As such, the
revenues subject to variance deferral flow-through to ratepayers should be increased from $303.732 million,
previously approved in Order G-llO-12, to $310.529 million. (Exhibit B-1, pp. 20-21, Exhibit B-3, BCPSO
IR 1.4.1)
14
Hemlock
17 of 24
APPENDIX A
to Order C-4-12
Page 18 of 20
3.4.3
Legal Regulatory and Closing Costs
FortisBC states that it expects to incur approximately $0.5 million in closing, legal and regulatory process
costs. (Exhibit B-1, p. 1) It requests approval to establish a deferral account, which it proposed to finance at
the Company's approved capital structure of 60 percent debt and 40 percent equity, to capture these $0.5
million of costs and states that it will seek disposition of the deferral account in its 2014 Revenue
Requirements Application (Exhibit B-1, pp. 3,9).
FortisBC submits that the closing costs are prudent and necessary in order to acquire the City's electrical
utility assets and that prudently incurred costs to acquire assets that are beneficial to customers should be
recovered from customers (Exhibit B-9, BCUC IR 2.1.1).
No Interveners made any submissions on this issue.
Given that the 2013 rates have already been established in the 2012-2013 RRA/ISP Decision, the Panel finds
that establishment of a deferral account to recognize the 2013 rate differences is appropriate. Accordingly,
FortisBC is directed to establish a non-rate base deferral account to capture the 2013 rate differences
resulting from the Transaction. The 2013 rate difference deferral account shall accrue short-term interest
at FortisBC's approved 2013 short-term interest rate of 3.48 percent and FortisBC must seek disposition of
the deferral account in its 2014 Revenue Requirements Application. The Panel understands that the
original estimate of $1.98 million may vary according to the other directives in these Reasons. FortisBC is to
provide the Commission with a recalculated rate difference value in its Compliance filing. Further, FortisBC's
request for an increase to the 2013 base revenues for revenue flow-through mechanism purposes is
approved, subject to a compliance filing which also incorporates the other directives as set out in these
Reasons.
FortisBC may also include up to an additional $0.5 million to cover legal, regulatory and closing costs in a
deferral account, bearing interest at 3.4 percent, for disposition as part of its 2014 Revenue Requirements
Application, as requested.
3.5
Tolko Power Purchase Agreement
ICG/Celgar note that if the Transaction proceeds, Tolko will no longer be an indirect, but rather a direct
customer of FortisBC. ICG/Celgar further submit that section 2.1 of Rate Schedule 3808 BC Hydro power
purchase agreement (PPA) between BC Hydro and FortisBC " ...would seem to raise significant issues for the
nature of utility service to Tolko ifTolko was to become a direct customer of Fortis." (T3:108)
BC Hydro disagrees, stating that interpreting and/or changing Section 2.1 of the PPA should not be within
the scope of this proceeding. BC Hydro submits that Section 2.1 of the PPA could potentially be relevant to
the terms of FortisBC's service to Tolko, if this application is approved, and only in the event that Tolko
proposes to sell self-generated energy. BC Hydro maintains that Tolko is not presently selling self-generated
electricity, and there is no proposal before the Commission related to such sales of self-generated electricity
or the terms of FortisBC's service at such times. Both Tolko and FortisBC concur (T3:109, 110-111, 113, 126).
APPENDIX A
to Order C-4-12
Page 19 of 20
The Commission Panel notes that this issue only has relevance if the Transaction proceeds. Accordingly,
further submissions will be sought from parties if, as and when the Transaction closes. The existing rates to
Tolko are set as interim until such time as a determination on this issue is made.
4.0
SUMMARY OF DIRECTIVES
1.
A Certificate of Public Convenience and Necessity is granted for the Transaction, subject to the
conditions as set out in Directives 2 through 10 of this Order. FortisBC is to confirm acceptance of the
conditions through a compliance filing by March 31, 2013.
2.
FortisBC must calculate the amount of the purchase price allowed into rate base as follows:
a.
Begin with the capital asset value and construction work in progress of $29.2 million and
$3.7 million, respectively, as per the City's audited December 31,2011 financial statements;
b. Add actual 2012 capital additions of $4.1 million, minus a full year of depreciation of
$1.1 million;
c. Add estimated 2013 first quarter capital additions of $1.4 million, minus first quarter
depreciation of $0.3 million. The 2013 first quarter capital additions and first quarter
depreciation expense are to be adjusted to actual.
3.
FortisBC may include in rate base the estimated 2012 assessed value of the land of $0.7 million.
4.
The difference between the purchase price and the sum of the amounts from Directives 2 and 3 is to be
treated as an acquisition premium which is to the account of the shareholder.
5.
FortisBC must establish a non-rate base deferral account to capture the 2013 Customer Benefit resulting
from the Transaction. The Customer Benefit deferral account shall accrue short-term interest at
FortisBC's approved 2013 short-term interest rate of 3.48 percent. FortisBC must seek disposition of the
deferral account in its 2014 Revenue Requirements Application.
6.
FortisBC must advise the Commission within two business days of the Transaction receiving final
approval of its Board of Directors, which is required for the completion of the Transaction.
7.
FortisBC must begin billing customers currently served by the City on the appropriate FortisBC rate
schedule as soon as practicable after the completion of the Transaction.
8.
FortisBC must establish a non-rate base deferral account to capture closing, regulatory process and legal
costs up to a maximum of $0.5 million. The deferral account shall accrue short-term interest at
FortisBC's approved 2013 short-term interest rate of 3.48 percent. FortisBC must seek disposition of the
deferral account in its 2014 Revenue Requirements Application.
9.
The rate currently charged by the City to Tolko Industries Ltd. is set as an interim rate to be charged
pending a further determination after the Transaction has been approved by the Board of Directors of
FortisBC.
APPENDIX A
to Order C-4-12
Page 20 of 20
10. FortisBC's request for an increase to the 2013 base revenues for revenue flow-through mechanism
purposes is approved subject to a compliance filing which incorporates all of the above adjustments.
DATED at the City of Vancouver, in the Province of British Columbia, this
A.A.
RHODES
COMMISSIONER
B.A.
MAGNAN
COMMISSIONER
day of March 2013.
ATTACHMENT
to Order C-4-12
Page 1 of 3
ATTACHMENT
Procedure on application
46 (1) An applicant for a certificate of public convenience and necessity must file with the commission
information, material, evidence and documents that the commission prescribes.
(2) The commission has a discretion whether or not to hold any hearing on the application.
(3) Subject to subsections (3.1) to (3.3), the commission may, by order, issue or refuse to issue the
certificate, or may issue a certificate of public convenience and necessity for the construction or operation
of a part only of the proposed facility, line, plant, system or extension, or for the partial exercise only of a
right or privilege, and may attach to the exercise of the right or privilege granted by the certificate, terms,
including conditions about the duration of the right or privilege under this Act as, in its judgment, the public
convenience or necessity may require.
(3.1) In deciding whether to issue a certificate under subsection (3) applied for by a public utility other than
the authority, the commission must consider
(a) the applicable of British Columbia's energy objectives,
(b) the most recent long-term resource plan filed by the public utility under section 44.1, if any, and
(c) the extent to which the application for the certificate is consistent with the applicable
requirements under sections 6 and 19 of the Clean Energy Act,
(3.2) Section (3.1) does not apply if the commission considers that the matters addressed in the application
for the certificate were determined to be in the public interest in the course of considering a long-term
resource plan under section 44.1.
(3.3) In deciding whether to issue a certificate under subsection (3) to the authority, the commission, in
addition to considering the interests of persons in British Columbia who receive or may receive service from
the authority, must consider and be guided by
(a) British Columbia's energy objectives,
(b) an applicable integrated resource plan approved under section 4 of the Clean Energy Act, and
(c) the extent to which the application for the certificate is consistent with the requirements under
section 19 of the Clean Energy Act.
(4) If a public utility desires to exercise a right or privilege under a consent, franchise, licence, permit, vote or
other authority that it proposes to obtain but that has not, at the date of the application, been granted to it,
the public utility may apply to the commission for an order preliminary to the issue of the certificate.
(5) On application under subsection (4), the commission may make an order declaring that it will, on
application, under rules it specifies, issue the desired certificate, on the terms it designates in the order,
after the public utility has obtained the proposed consent, franchise, licence, permit, vote or other
authority.
(6) On evidence satisfactory to the commission that the consent, franchise, licence, permit, vote or other
authority has been secured, the commission must issue a certificate under section 45.
ATTACHMENT
to Order C-4-12
Page 2 of 3
(7) The commission may, by order, amend a certificate previously issued, or issue a new certificate, for the
purpose of renewing, extending or consolidating a certificate previously issued.
(8) A public utility to which a certificate is, or has been, issued, or to which an exemption is, or has been,
granted under section 45 (4), is authorized, subject to this Act, to construct, maintain and operate the plant,
system or extension authorized in the certificate or exemption.
Discrimination in rates
59 (i) A public utility must not make, demand or receive
(a) an unjust, unreasonable, unduly discriminatory or unduly preferential rate for a service provided
by it in British Columbia, or
(b) a rate that otherwise contravenes this Act, the regulations, orders of the commission or any
other law.
(2) A public utility must not
(a) as to rate or service, subject any person or locality, or a particular description of traffic, to an undue
prejudice or disadvantage, or
(b) extend to any person a form of agreement, a rule or a facility or privilege, unless the agreement, rule,
facility or privilege is regularly and uniformly extended to all persons under substantially similar
circumstances and conditions for service of the same description.
(3) The commission may, by regulation, declare the circumstances and conditions that are substantially
similar for the purpose of subsection (2) (b).
(4) It is a question of fact, of which the commission is the sole judge,
(a) whether a rate is unjust or unreasonable,
(b) whether, in any case, there is undue discrimination, preference, prejudice or disadvantage in
respect of a rate or service, or
(c) whether a service is offered or provided under substantially similar circumstances and
conditions.
(5) In this section, a rate is "unjust" or "unreasonable" if the rate is
(a) more than a fair and reasonable charge for service of the nature and quality provided by the
utility,
(b) insufficient to yield a fair and reasonable compensation for the service provided by the utility, or
a fair and reasonable return on the appraised value of its property, or
(c) unjust and unreasonable for any other reason.
Setting of rates
60 (i) In setting a rate under this Act
(a) the commission must consider all matters that it considers proper and relevant affecting the rate,
(b) the commission must have due regard to the setting of a rate that
(i) is not unjust or unreasonable within the meaning of section 59,
ATTACHMENT
to Order C-4-12
Page 3 of 3
(ii) provides to the public utility for which the rate is set a fair and reasonable return on any
expenditure made by it to reduce energy demands, and
(iii) encourages public utilities to increase efficiency, reduce costs and enhance performance,
(b.l) the commission may use any mechanism, formula or other method of setting the rate that it considers
advisable, and may order that the rate derived from such a mechanism, formula or other method is to
remain in effect for a specified period, and
(c) if the public utility provides more than one class of service, the commission must
(i) segregate the various kinds of service into distinct classes of service,
(ii) in setting a rate to be charged for the particular service provided, consider each distinct class of
service as a self contained unit, and
(iii) set a rate for each unit that it considers to be just and reasonable for that unit, without regard
to the rates set for any other unit.
(2) In setting a rate under this Act, the commission may take into account a distinct or special area served by
a public utility with a view to ensuring, so far as the commission considers it advisable, that the rate
applicable in each area is adequate to yield a fair and reasonable return on the appraised value of the plant
or system of the public utility used, or prudently and reasonably acquired, for the purpose of providing the
service in that special area.
(3) If the commission takes a special area into account under subsection (2), it must have regard to the
special considerations applicable to an area that is sparsely settled or has other distinctive characteristics.
(4) For this section, the commission must exclude from the appraised value of the property of the public
utility any franchise, licence, permit or concession obtained or held by the utility from a municipal or other
public authority beyond the money, if any, paid to the municipality or public authority as consideration for
that franchise, licence, permit or concession, together with necessary and reasonable expenses in procuring
the franchise, licence, permit or concession.

CPCN for the Purchase of the Utility Assets of the City of Kelowna

Transcription

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