Decision 2011-399
EPCOR Distribution & Transmission Inc.
Determination of Whether an Audit of
Corporate Costs is Required
October 7, 2011
The Alberta Utilities Commission
Decision 2011-399: EPCOR Distribution & Transmission Inc.
Determination of Whether an Audit of Corporate Costs is Required
Application No. 1605759
Proceeding ID No. 437
October 7, 2011
Published by
The Alberta Utilities Commission
Fifth Avenue Place, Fourth Floor, 425 First Street S.W.
Calgary, Alberta
T2P 3L8
Telephone: 403-592-8845
Fax: 403-592-4406
Web site: www.auc.ab.ca
Contents
1
Introduction ........................................................................................................................... 1
2
Background ........................................................................................................................... 2
3
Issues ...................................................................................................................................... 3
4
Order ...................................................................................................................................... 7
5
Additional comments of Commission Members Lyttle and Yahya .................................. 8
Appendix 1 – Proceeding participants ...................................................................................... 13
Appendix 2 – Oral hearing – registered appearances ............................................................. 15
AUC Decision 2011-399 (October 7, 2011) • i
The Alberta Utilities Commission
Calgary, Alberta
EPCOR Distribution & Transmission Inc.
Determination of Whether an Audit of
Corporate Costs is Needed
1
Decision 2011-399
Application No. 1605759
Proceeding ID No. 437
Introduction
1.
On April 12, 2011, EPCOR Distribution & Transmission Inc. (EDTI) filed a negotiated
settlement agreement (NSA) of its 2010 and 2011 corporate costs applicable to both EDTI and to
EPCOR Energy Services Alberta Inc. (EEAI). EDTI requested approval of the settlement as well
as, in accordance with the settlement, a determination by the Alberta Utilities Commission (the
AUC or the Commission) as to the need for an audit of corporate costs and the scope of the audit
if it is ruled necessary. The audit would not affect the 2010 and 2011 approved corporate costs
but could affect approved costs beginning in 2012.
2.
The NSA, including the matter of an audit, was a separate module to Proceeding ID.
No. 437. Two previous decisions have been issued under this proceeding: Decision 2010-5051
(the initial decision on EDTI’s Phase I general tariff application, which excluded most aspects of
corporate costs) and Decision 2011-2622 (approving the negotiated settlement of corporate costs
for 2010 and 2011). This decision on the need for an audit completes Proceeding ID No. 437.
3.
The division of the Commission assigned to deal with this audit module is comprised of
Commission Member Bill Lyttle, Commission Member Mark Kolesar, and Commission Member
Moin A. Yahya, who chaired this division panel.
4.
Notice of this audit module was provided to registered parties in letters and
communication filed on the record of this proceeding. The original notice for Proceeding ID.
No. 437 was published on the Commission's website on the electronic proceeding system on
December 23, 2009. The original notice was also published in the following newspapers on
January 4, 2010: The Edmonton Journal, the Calgary Herald, the Edmonton Sun, and the Calgary
Sun.
5.
In reaching the determinations set out within this decision, the Commission has
considered all relevant materials comprising the record of this proceeding, including the
evidence and argument provided by each party. Accordingly, references in this decision to
specific parts of the record are intended to assist the reader in understanding the Commission’s
reasoning 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.
1
2
Decision 2010-505: EPCOR Distribution & Transmission Inc., 2010-2011 Phase I Distribution Tariff,
2010-2011 Transmission Facility Owner Tariff, Application No. 1605759, Proceeding ID. 437, October 28,
2010.
Decision 2011-262: EPCOR Distribution & Transmission Inc. and EPCOR Energy Alberta Inc., 2010-2011
Corporate Costs Module – Approval of a Negotiated Settlement Agreement, Application No. 1605759,
Proceeding ID No. 437, June 21, 2011.
AUC Decision 2011-399 (October 7, 2011) • 1
Determination of Whether an Audit of Corporate Costs is Needed
2
EPCOR Distribution & Transmission Inc.
Background
6.
The issue of whether an audit of corporate costs is warranted, first arose in the expert
evidence which was prepared by Overland Consulting,3 filed by the Office of the Utilities
Consumer Advocate (UCA) in the corporate costs module. This evidence included the following:
Question 42. Does this suggest that the new allocation procedures are
inappropriate?
Answer 42. Not necessarily. However, the allocation methodology that was used to
allocate costs to EUI regulated utilities in 2008 represented a process that the
Commission had previously reviewed and approved. As such, it can reasonably be
assumed that both the Commission and the Company believed that this methodology
represented a sound and rational process for allocating costs. The proposed methodology
seems to be producing cost allocations that are materially different than allocated under
the previous methodology. As such, we believe that the effects of the methodology
changes and the allocation procedures themselves need additional scrutiny through a
focused audit.
7.
The UCA’s expert evidence also addressed the scope of the proposed audit as follows:
Answer 63. We are of the opinion that the EUI Corporate Service procedures merit
further scrutiny. We recommend that the Commission authorize an independent focused
audit of EUI Corporate and Shared Services, the scope of which would include:
An assessment of the scope and cost of services being provided to the EUI regulated
utilities;
A review of the adequacy of internal controls over the procedures employed to assure
that costs are properly incurred, allocated and assigned to the regulated utilities;
A review of what procedures, if any, may exist to allow the utility subsidiaries to
review and control costs charged to them by EUI; and
A review of what reporting requirements may be useful for the Commission to monitor
the reasonableness of EUI Corporate Services activities outside of the rate setting
process.
8.
In its summary the UCA’s expert evidence submitted that:
Answer 11. Independent of any determination of the current and expected status of the
CPC – EUI relationship, EUI’s regulated entities should not be expected to directly or
indirectly subsidize the cost of EUI or CPC operations. Regardless of the specific
recognition of corporate costs in setting EDTI rates, a more detailed focused audit of EUI
Corporate services and related costs, including cost allocations should be authorized by
the AUC.
9.
In AUC-UCA-9, as revised, [Exhibits 264.02 and 264.03] the UCA provided additional
details and the scope of the proposed audit. This information response also indicated that:
It is Overland’s position that the evidence in this record does not adequately address the
questions posed by the AUC for this phase of these proceedings, and that a more detailed,
3
Exhibit 245.02, Testimony of Howard E. Lubow And Robert F. Welchlin on Behalf of the Office of the Utilities
Consumer Advocate.
2 • AUC Decision 2011-399 (October 7, 2011)
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
independent study should be performed to allow the Commission to more fully consider
the question of corporate costs.
10.
Clauses 8 to 11 of the NSA [Exhibit 260.03] dealt with the proposed audit and the
determination that the parties agreed that the Commission should make in relation to the audit
recommended in the UCA-sponsored evidence.
11.
The UCA submitted in a letter dated April 27, 2011 that it was imperative for Overland
Consulting to provide testimony and evidence directly to the Commission respecting the need,
scope and process of an audit in this matter, and that without an oral hearing it would be severely
prejudiced. The Consumers’ Coalition of Alberta supported this letter.
12.
EDTI, in a letter dated April 27, 2011, noted that the previous schedule for the corporate
cost module, before it was suspended, had included the opportunity for EDTI to submit rebuttal
evidence, an oral hearing, and final and reply argument. EDTI therefore expected the opportunity
to submit rebuttal evidence regarding the audit matter in the re-activated corporate costs module.
Given the narrowed scope that was left to be determined, an oral hearing did not appear to EDTI
to be necessary.
13.
The UCA reiterated in a letter dated April 29, 2011 its view that an oral hearing was
necessary.
14.
In a letter dated May 13, 2011, the Commission advised that a hearing on the audit matter
would be held in Edmonton on June 8, 2011. Argument was received on June 27, 2011, and
reply argument was received on July 11, 2011. Therefore the record for this matter closed on
July 11, 2011.
3
Issues
15.
The Commission notes that the corporate costs related to 2010 and 2011 were approved
in the NSA decision. The proposed audit, although it was proposed in the 2010-2011 proceeding,
would impact costs only in 2012 and beyond.
16.
The UCA submitted it is necessary that an audit, as proposed by Overland, be performed
for the reasons indicated in items (a) to (f) below.4 The CCA supported the arguments of the
UCA. The Commission will address each of the reasons indicated by the UCA in turn.
(a) The quantum of the corporate costs being allocated is significant and material
Views of the Commission
17.
The Commission agrees with this statement and notes that it appears that this reason was
not disputed by any party.
4
UCA argument, paragraph 10.
AUC Decision 2011-399 (October 7, 2011) • 3
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
(b) The Commission must be able to understand the impact of the divestiture of CPC and
the resulting changes to the allocation of EUI’s corporate costs
Views of the Commission
18.
The Commission concurs with this statement. In particular, in Decision 2010-505, the
Commission noted the reduction in economies of scale that resulted from the divestiture of
Capital Power Corporation (Capital Power or CPC) was an issue.5 This issue was pursued by
parties and by the Commission throughout EDTI’s Phase I general tariff application process and
the corporate cost module.
19.
EDTI’s application had allocated virtually all of EPCOR Utilities Inc.’s (EUI’s) corporate
costs, net of a direct allocation to Capital Power, among its utility subsidiaries, EDTI, EEAI and
EPCOR Water Services Inc. (EWSI). Other than certain traditionally disallowed costs, including
external hearing costs in excess of the Commission’s scale, a portion of incentive pay amounts,
and certain donation amounts, essentially no corporate costs were treated as costs not to be
allocated to the utilities.
20.
EUI reduced its forecast total corporate costs in 2010 and 2011 to reflect its smaller size
with the separation of and partial divesture of Capital Power. The Commission notes that after
the partial divestiture of Capital Power, EUI continued to hold 49 per cent of the voting interest
and 72 per cent of the equity interest in capital Power.6 However, with the partial divesture of
Capital Power, and the resulting corporate redesign, EDTI argued that there was a loss of
economies of scale. As noted in Decision 2010-505, EDTI provided the quantum of lost
economies of scale as $9.03 million for 2010 and $11.29 million for 2011 (apparently for EEAI
and EDTI together).7
21.
EDTI’s position was that its customers had benefited in the past from the economies of
scale created by EUI’s ownership of Capital Power and that the loss in economies of scale due to
the divesture of Capital Power was a cost that should be allocated to EDTI, EEAI and EWSI
since the remaining corporate costs represented the base level of costs required to operate and
govern EUI after the divestiture.8
22.
Because the NSA approved by the Commission in Decision 2011-262 addressed EDTI’s
(and EEAI’s) corporate costs for 2010 and 2011, it is not necessary for the Commission to rule
on the matter of any lost economies of scale for those years. The Commission will deal, in due
course, with the issue of lost economies of scale that remain in 2012 when EDTI files its general
tariff application for that test year. In the Commission’s view, EPCOR Utilities Inc. has an
obligation to insure that the remaining corporate costs that it wishes to allocate to regulated
utilities are the base level needed for its reduced scope of operation and that the allocation of this
base level of costs to the regulated utilities is correct.
23.
Based on matters discussed in Section 4.3 of Decision 2010-505 and further pursued in
the corporate cost module, in addressing issues related to the quantum of lost economies in
EDTI’s revenue requirement for 2012, the Commission expects to consider the following:
5
6
7
8
Decision 2010-505, Section 4.3.4.
Exhibit 65, EDTI application, paragraph 128.
Decision 2010-505, paragraph 93.
Decision 2010-505, paragraphs 91 and 92.
4 • AUC Decision 2011-399 (October 7, 2011)
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
i)
whether some corporate costs should be allocated to EUI itself for its management of
its investment in Capital Power
ii)
whether some corporate costs should be allocated to EUI itself for its management of
the funds remaining from its partial sale of Capital Power
iii)
whether any corporate costs constitute business development costs unrelated to EDTI
and EEAI and are therefore not recoverable from customers of EDTI and EEAI
iv)
whether the costs for any remaining services provided to Capital Power are in excess of
the direct charges to Capital Power
v)
whether or not EUI has adequately adjusted its corporate costs to reflect its smaller size
vi)
whether or not EUI has acquired any new businesses to which it should allocate some
of its corporate costs
vii) whether there are any legal principles that the Commission should consider in
addressing the issue of lost economies of scale
viii) whether any adjustments are required if it is determined that EUI, as opposed to
customers, should pay for any or all lost economies of scale that would remain in 2012
and beyond
(c) Only an audit as proposed by Overland will provide sufficient information, as the “long
established process” has been followed by the parties in the Phase I proceeding and this
corporate costs module and the issues and concerns giving rise to this module are still existent.
Views of the Commission
24.
The Commission is not convinced that only an audit can provide sufficient information.
In this regard, the Commission concurs with much of EDTI’s detailed argument refuting this
assertion and with EDTI’s conclusion that the UCA has failed to demonstrate that the proposed
audit is necessary. In particular, the Commission notes the large amount of evidence regarding
corporate costs that was filed in the original general tariff application as well as in the corporate
module, as detailed by EDTI in its reply argument.
25.
The Commission has traditionally dealt with corporate costs and all other costs without
audits and the UCA has not convinced the Commission that this audit is needed in order for it to
properly test EDTI’s 2012 forecast corporate costs. The Commission notes that EDTI will once
again file details of EUI’s corporate costs in its 2012 application and parties will have the benefit
of several years of actual (as opposed to forecast) operation after the partial divestiture of CPC.
26.
Further, the matter of who should bear the cost of the lost economies of scale is a legal
and conceptual issue that parties agreed would not likely be addressed in an audit. In the
Commission’s view, this matter centers on regulatory principles and is not a matter best
addressed by an audit.
27.
Lastly, the Commission is cognizant of the concerns raised by EDTI regarding resources
and the level of costs that would likely be incurred in such an audit. While there may be
AUC Decision 2011-399 (October 7, 2011) • 5
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
circumstances where this form of regulatory audit is warranted, for the reasons set out above the
Commission does not consider that the estimated costs ($400,000 to $600,000 as estimated by
the UCA’s experts)9 are warranted in this case.
(d) There are identifiable problems with the corporate cost allocation methodology that is
being utilized by EPCOR
Views of the Commission
28.
The Commission is not convinced that there are identifiable problems with EUI’s
corporate cost allocation methodology nor does it consider that an audit is required to address
any such issues.
29.
As noted above, virtually all of the corporate costs, net of a direct assignment of costs to
Capital Power Corporation, are either directly assigned to or allocated to EDTI, EEAI, and
EWSI. Each of these are regulated companies, although EWSI and EEAI also have some
unregulated operations The Commission also notes that the allocation methodology adopted by
EUI after the divestiture of CPC does not differ significantly from the methodology approved by
the Commission prior to the divestiture. Barring major changes to that methodology, the
Commission expects that in the 2012 general tariff application (GTA) there will be less focus on
whether that allocation methodology is correct; rather, the issue to be considered is whether the
cost of the diseconomies of scale, which EDTI has reasonably well identified for 2010 and 2011,
should be borne in total by utility customers in 2012 and beyond. In the Commission’s view, the
audit proposed by the UCA would not address this issue.
30.
The Commission agrees with EDTI’s position that the UCA has failed to demonstrate
that the alleged problems exist or that they provide justification of an audit.10 Given the largely
regulated nature of the three utilities, the Commission has no reason to believe that EUI has any
particular incentive to favor one utility over another in its allocations. The Commission considers
that its traditional method of scrutinizing the cost allocations to the three utilities provides the
required information. The Commission is not convinced that an audit is necessary in order to test
and properly regulate this cost allocation process. Therefore, the Commission rejects the
assertion that there are problems in the cost allocation process which require an audit to resolve.
(e) The proposed audit is compatible with forecasting based regulation
Views of the Commission
31.
The Commission has no reason to disagree with this statement. However, for the reasons
noted above, the Commission is not persuaded that an audit is required in this case.
9
10
Transcript, Volume 8, page 1730 (June 8, 2011).
EDTI reply argument, Section 3.3.
6 • AUC Decision 2011-399 (October 7, 2011)
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
(f) The proposed audit is needed in light of anticipated performance based regulation and
expected corporate acquisitions by EUI
Views of the Commission
32.
The Commission is not convinced that the proposed audit is needed in light of anticipated
performance based regulation, however that is a matter that parties can bring forward for the
Commission’s consideration in the performance based regulation process (Proceeding ID No.
566). As for expected acquisitions, the Commission considers that the matter of expected
acquisitions is too speculative to justify an audit of this type and scale.
Conclusion
33.
In conclusion, for all of the reasons set out above, the Commission is not convinced that
the independent audit described by UCA is required.
4
34.
Order
It is hereby ordered that:
(1)
The request that the Commission authorize an independent focused audit of EUI’s
corporate and shared services is denied.
Dated on October 7, 2011.
The Alberta Utilities Commission
(original signed by)
Moin A. Yahya
Panel Chair
(original signed by)
Bill Lyttle
Commission Member
(original signed by)
Mark Kolesar
Commission Member
AUC Decision 2011-399 (October 7, 2011) • 7
Determination of Whether an Audit of Corporate Costs is Needed
5
EPCOR Distribution & Transmission Inc.
Additional comments of Commission Members Lyttle and Yahya
35.
We concur in the outcome and reasons of this decision, but we write separately to express
some concerns regarding the regulatory principles that were not adequately addressed by the
parties in this proceeding. Our views are not the sine qua non for the outcome of this decision or
for the outcome of the decision approving the NSA in Decision 2011-262. Rather, these views
are meant to provide guidance to the parties in the future when the issue of corporate costs may
arise again. Indeed, we had some questions about the magnitude of corporate costs allocated to
customers in the NSA, but we balanced our concerns against the need for regulatory efficiency,
the good faith efforts of the parties who negotiated the settlement, and the need for finality in this
prolonged proceeding.
36.
We had asked during the original hearing EDTI’s witnesses for some regulatory
principles,11 but we did not receive a satisfactory reply. Neither did the interveners add much
clarity to the issue of regulatory principles concerning the allocation of corporate costs to
customers. And so while we deny the UCA’s motion for a regulatory audit and approve the NSA,
this should not be taken as an approval of EDTI’s methodology, at least on the part of these two
concurring members of the Commission.
37.
EDTI has, essentially, argued a principle of symmetry. This principle states that just as a
utility is expected to pass on any savings from economies of scale or scope to customers when
they expand their operations, so too should customers be expected to share in some of the
burdens when a utility divests itself of some of its holdings. This argument has some appeal, and
the UCA has unwittingly accepted this argument when it made its motion for a regulatory audit.
The UCA’s argument, in essence, is that it doesn’t dispute EDTI’s theory of symmetry, but
rather, it questions the appropriateness of the share of the corporate costs that EDTI is attributing
to itself as opposed to CPC.
38.
The UCA, in our view, misses the point. A regulatory audit is just that – an audit. An
audit of an item is an examination and verification of the item’s accuracy. It, however, misses the
fundamental question of whether the item should even exist in the first place regardless of how
accurately it is measured. In other words, the real issue is not whether EDTI is accurately
attributing certain corporate costs to itself, but whether those costs should be attributed in the
first place. To answer this question requires a proper understanding of the regulatory principles
that govern utility ratemaking. These principles should have been established in the proceeding
itself and not left to a consultant and an audit process.
39.
The principle behind utility ratemaking is the idea that utilities are natural monopolies.
Left to their own devices, they would charge customers a monopoly price (for inferior service),
which is above the price that would prevail had the market been competitive. The regulator
tames the monopoly by setting the price to mimic what the competitive market would have
produced had there been competition in the first place. Theoretically this amounts to some form
of marginal cost pricing, but in reality, it amounts to pricing that allows for the recovery of
prudently incurred costs plus a reasonable rate of return. None of this is news to anyone who
may read this decision. The more interesting question, therefore, is how to put this principle into
practice with the current facts at hand.
11
Transcript, Volume 4 at pages 992-1005 and 1008- 1014 (June 14, 2010); Transcript, Volume 8, at pages
1612-1641 (June 13, 2011).
8 • AUC Decision 2011-399 (October 7, 2011)
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
40.
One way to do so is to envision how the competitive market would behave if there were a
situation similar to the present set of facts. Consider two firms A and B. They sell ice-cream and
hamburgers. It turns out that A and B can sell their wares in one physical location as customers
who like hamburgers also like ice-cream. If A and B merged, they would be able to save on the
rental overhead, since they now can rent one space instead of two. The average rent per unit sold
of ice-cream or hamburger can now be halved, thereby giving the newly merged firm a
competitive advantage over its rivals. If, after many years, A and B decide their marriage is no
longer amicable, either due to changing market conditions or simply managerial conflicts, the
two may decide to split. In doing so, however, they now face the prospect of having to each rent
a separate physical location to sell their products. This will mean that the newly un-merged firms
A and B will have to either raise their prices or absorb the increased rent in their own profit
margins. The competitive market, being what it is, will mean that most likely that A and B will
be unable to increase their prices. As such, they must achieve some operational savings
elsewhere.
41.
So why would A and B decide to end their relationship? It must be that whatever
overhead losses they incur from the split will be more than offset by other savings that each of
them will achieve. In other words, private gains from a divestiture will motivate such a move
despite the possible loss of savings due to common overhead expenses. CPC and EDTI chose to
part ways for a variety of reasons that surely must make sense to the EPCOR organization as a
whole. If, as in the competitive marketplace, it made financial and operational sense to split, then
surely, as in the competitive marketplace, it would make sense that EDTI cannot pass on all of
the lost savings to customers.
42.
This, of course, runs counter to EDTI’s symmetry principle. It may also run counter to
the “stand-alone” principle depending on how that principle is applied. The “underpinning of the
stand-alone principle is that the regulated utility should not be subsidizing its non-utility
operations or operations of members of its corporate family, neither should the non-regulated
activities subsidize the utility operations.”12 The asymmetric treatment of a utility in this
situation, therefore, creates a “shield-sword” dichotomy, a dichotomy not unknown to those
practicing the common law and regulatory law alike.13
43.
For example, in AltaLink Management Ltd., AltaLink sought to have the Alberta Energy
and Utilities Board (board or EUB) calculate an income tax allowance commensurate with a
taxable entity.14 The City of Calgary objected and argued it was inappropriate to raise the just
and reasonable rate of return under the stand-alone principle,15 because the stand-alone principle
was developed to shield customers from absorbing the cost of funds resulting from decisions of
consolidated entities.16 The board took a middle ground approach and decided to establish a tax
allowance by looking at the tax status of AltaLink’s partners. The board stated “that in a cost of
12
13
14
15
16
Decision 2003-061: AltaLink Management Ltd. and TransAlta Utilities Corporation Transmission Tariff for
May 1, 2002 – April 30, 2004, TransAlta Utilities Corporation Transmission Tariff for January 1, 2002 –
April 30, 2002, Application Nos. 1279345, 1279347, and 1287507, August 3, 2003
In other areas of the law, the idea that certain doctrines can be used as a shield and not a sword, i.e. an
asymmetrical usage of a doctrine, is not new. Promissory estoppel, privity of contract, acquiescence, the statute
of frauds, and so many more areas of the law too numerous to justly enumerate in this footnote, are but a few
examples where the doctrine allows one party to use the doctrine as a shield against another’s claims but not
establish the claims in the first place.
AltaLink Management Ltd. and TransAlta Utilities Corporation, Decision 2003-061, page 78.
Ibid, at page 79.
Ibid.
AUC Decision 2011-399 (October 7, 2011) • 9
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
service jurisdiction where revenue and costs are forecast on a prospective basis, a cost is
recoverable in customer rates if there is a reasonable expectation that it will be incurred.”17 Prior
to the hearing, interestingly, one of the partners had a tax free status but later changed it. The
board, however, made no allowance for that partner since there was “no such expectation with
respect to income taxes when the partner is initially structured as non-taxable and later
inexplicably changes its tax status with the result that customers are expected to provide it with
an income tax allowance.”18
44.
The courts have always affirmed the flexibility of the Commission to examine the
corporate structure of utilities and its parent organization with respect to setting rates. In ATCO
Electric Ltd. v. Alberta (Energy & Utilities Board),19 the Court of Appeal held that the EUB
“ha[d] the jurisdiction to segregate business functions of an integrated utility – and determine a
notional corporate organizational model – for purposes of evaluating risk and calculating prudent
carrying costs associated therewith.”20 The Court approved of the board’s actions which were in
line with evidence of independent financial experts, and noted with approval that the board
followed the advice of the experts that:
… the Board should “not apply the stand-alone principle by rote. Instead the Board
should deal with the reality, utilize independence of thought, question assumptions and
think through whether an approach that has been applied in the past in different
circumstances should be applied now in new circumstances. Such an approach should
lead the Board to deal with reality and decline to apply the stand-alone principle to the
detriment of the customers of the [distribution companies].21
45.
EDTI advanced another principle to bolster its argument for the symmetry principle. It
argued that to treat the corporate costs asymmetrically would create a perverse incentive for
EDTI, or any other similarly situated utilities. If a utility was expected to pass its economies of
scale and scope savings onto customers but not allowed to recoup any losses from them, then this
would remove any incentive by the utility to seek out those economies in the first place. This
argument has some merit, and it is no surprise, therefore, that the current focus of the
Commission for the next few years is the design of efficiency-seeking incentives for all utilities.
The UCA did not advance a good response to this argument other than to seek out an audit of the
costs. In our view, this principle is a better principle than a pure symmetry principle. This
symmetry plus incentive principle at least provides the Commission, or at least these two
concurring Commission Members, some comfort in knowing that the interests of customers are
also being considered.
46.
Whether a utility would require a full symmetric treatment of corporate costs in order to
motivate it to achieve efficiencies or whether some partial recovery would be enough is an openended question that we expect EDTI could pursue in the future. Similarly, we expect the
interveners to turn their mind to this principle as well as the asymmetric principle, or the “shieldsword” principle as we called it.
17
18
19
20
21
Ibid, at page 84.
Ibid.
ATCO Electric Ltd. v. Alberta (Energy & Utilities Board), 2004 ABCA 215.
Ibid. at paragraph 181.
Ibid, at paragraphs 178-181.
10 • AUC Decision 2011-399 (October 7, 2011)
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
47.
In addition to the “shield-sword” principle, which could disallow some or all of the lost
economies of scale and scope costs, the Commission would want to understand how long some
or all of those costs should remain unrecoverable, and when such a typical cost of service
allocation may be re-established.
48.
At the end of the day, this discussion does not impact our approval of the NSA or the
denial of the UCA’s motion for the regulatory audit. Nor, for that matter, do these views affect
any future applications. They are merely a non-exhaustive list of principles worth considering
meant to provide guidance to all parties as to some of the proper principles that need to be
flushed out more cogently in future proceeding in order to assist the Commission in reaching
more soundly reasoned decisions.
(original signed by)
Moin A. Yahya
Panel Chair
(original signed by)
Bill Lyttle
Commission Member
AUC Decision 2011-399 (October 7, 2011) • 11
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
Appendix 1 – Proceeding participants
Name of organization (abbreviation)
counsel or representative
EPCOR Distribution & Transmission Inc. (EDTI)
EPCOR Energy Alberta Inc. (EEAI)
J. Liteplo
D. Gerke
J. Elford
D. Tenney
ATCO Electric Ltd. (AE)
L. Keough
D. Freedman
B. Shkrobot
L. Kizuk
B. Yee
Consumers’ Coalition of Alberta (CCA)
J. A. Wachowich
A. P. Meraini
ENMAX Power Corporation (EPC)
G. Weismiller
C. Fluke
J. Worsick
FortisAlberta Inc. (Fortis)
T. Dalgleish
M. Stroh
J. Walsh
Industrial Power Consumers Association of Alberta (IPCAA)
M. Forster
S. Fulton
V. Bellissimo
R. Mikkelsen
Independent System Operator
J. Martin
G. Marinho
R. Sharma
A. Walters
Office of the Utilities Consumer Advocate (UCA)
C. R. McCreary
S. Mattuli
G. Hill
B. Shymanski
R. Bell
S. Radway
AUC Decision 2011-399 (October 7, 2011) • 13
Determination of Whether an Audit of Corporate Costs is Needed
The Alberta Utilities Commission
Commission Panel
M. A. Yahya, Panel Chair
B. Lyttle, Commission Member
M. Kolesar, Commission Member
Commission Staff
V. Slawinski (Commission Counsel)
S. Allen
B. Clarke
D. Cherniwchan
J. Olsen
D. Mazurkewich
14 • AUC Decision 2011-399 (October 7, 2011)
EPCOR Distribution & Transmission Inc.
Determination of Whether an Audit of Corporate Costs is Needed
EPCOR Distribution & Transmission Inc.
Appendix 2 – Oral hearing – registered appearances
Name of organization (abbreviation)
counsel or representative
Witnesses
EPCOR Distribution & Transmission Inc. (EDTI)
EPCOR Energy Alberta Inc. (EEAI)
J. M. Liteplo
R. Hillman
D. HasBrouk
D. Gerke
D. Sommerfeld
Office of the Utilities Consumer Advocate (UCA)
C. R. McCreary
T. A. Shipley
H. Lubow
R. P. Welchlin
Consumers’ Coalition of Alberta (CCA)
J. A. Wachowich
A. P. Merani
The Alberta Utilities Commission
Commission Panel
M. A. Yahya, Panel Chair
B. Lyttle, Commission Member
M. Kolesar, Commission Member
Commission Staff
V. Slawinski (Commission Counsel)
S. Allen
J. Olsen
D. Mazurkewich
AUC Decision 2011-399 (October 7, 2011) • 15