Aquila Networks Canada (Alberta) Ltd. · 2018-02-23 · Review and Variance of EUB Decisions...

Alberta Energy and Utilities Board

Decision 2004-027

Aquila Networks Canada (Alberta) Ltd. 2000 Pool Price Deferral Accounts Proceeding Review and Variance of Decision 2001-92 Regarding Carrying Cost Rates and Application of the “No-Harm” Test And Review and Variance of Decision 2001-93 Regarding Income Tax and Application of the “No-Harm” Test May 4, 2004

ALBERTA ENERGY AND UTILITIES BOARD Decision 2004-027: Aquila Networks Canada (Alberta) Ltd. 2000 Pool Price Deferral Accounts Proceeding Review and Variance of Decisions 2001-92 and 2001-93 Application No. 1257976 Published by Alberta Energy and Utilities Board 640 – 5 Avenue SW Calgary, Alberta T2P 3G4 Telephone: (403) 297-8311 Fax: (403) 297-7040 Web site: www.eub.gov.ab.ca

http://www.eub.gov.ab.ca/

Contents 1 INTRODUCTION................................................................................................................. 1

1.1 Decision 2001-92........................................................................................................... 1 1.1.1 Background....................................................................................................... 1

1.1.1.1 Deferral Accounts Regulation ......................................................... 2 1.1.1.2 Stand-Alone Principle ..................................................................... 2 1.1.1.3 Applying the “No-Harm” Test for ANCA ...................................... 3 1.1.1.4 Relevant Time Period for the “No-Harm” Test............................... 4 1.1.1.5 Business Risk of the PPDAs ........................................................... 5 1.1.1.6 Appropriate Capital Structure based on Business Risk and

Financial Risk.................................................................................. 5 1.1.2 ANCA Request for Review and Variance of Decision 2001-92 ...................... 7

1.2 Decision 2001-93........................................................................................................... 7 1.2.1 Background....................................................................................................... 7 1.2.2 ANCA Request for R&V of Decision 2001-93 ................................................ 9

2 BOARD DECISION REGARDING AQUILA R&V ........................................................ 9

3 HEARING PROCESS ........................................................................................................ 10

4 REASONS TO VARY - APPROPRIATENESS OF THE USE OF THE “NO-HARM” TEST .................................................................................................................................... 11 4.1 Views of the Parties.................................................................................................... 11 4.2 Views of the Board ..................................................................................................... 14

5 VARIANCE ......................................................................................................................... 16 5.1 Introduction................................................................................................................ 16 5.2 Background................................................................................................................. 17 5.3 Decision 2001-92......................................................................................................... 17

5.3.1 Carrying Cost Determination.......................................................................... 17 5.3.1.1 Views of the Parties....................................................................... 17 5.3.1.2 Views of the Board........................................................................ 23

5.4 Decision 2001-93......................................................................................................... 28 5.4.1 Carrying Cost Benefit of Deferred Income Taxes .......................................... 28

5.4.1.1 Views of the Parties....................................................................... 28 5.4.1.2 Views of the Board........................................................................ 29

5.4.2 Large Corporations Tax .................................................................................. 31 5.4.2.1 Views of the Parties....................................................................... 31 5.4.2.2 Views of the Board........................................................................ 32

6 SUMMARY OF BOARD APPROVED ANCA PPDA COST ADJUSTMENTS ......... 33

7 SUMMARY OF BOARD DIRECTIONS......................................................................... 33

8 ORDER ................................................................................................................................ 34

EUB Decision 2004-27 (May 4, 2004) • i

APPENDIX 1 – FINANCIAL COVENANT COMPLIANCE TESTS FOR ANCA DISCO AND PPDA APPLYING VARYING CAPITAL STRUCTURES FOR THE PPDA AS REPORTED IN BR.AQUILA-1 (SCHEDULES I(A) – (F)) ...... 35

APPENDIX 2 – ADJUSTMENT FOR REMOVAL OF THE “NO-HARM” TEST ON CARRYING COST BENEFIT of DEFERRED INCOME TAXES ........... 37

APPENDIX 3 – RECONCILIATION OF 2000 AND 2001 INCOME TAXES AS REPORTED IN BR.AQUILA-9 (SCHEDULE BR.AQUILA-9) ................ 39

List of Tables Table 1. ANCA Submitted PPDA Cost Adjustments – Decisions 2001-92 and 2001-93 17

Table 2. Revised Financial Risk Test Results – Recast Schedule I(a).............................. 27

Table 3. Adjustment for Removal of the “No-Harm” Test on Carrying Cost Benefit of Deferred Income Taxes.......................................................................................... 31

Table 4. Board Approved ANCA PPDA Cost Adjustments – Decisions 2001-92 and 2001-93 .......................................................................................................... 33

ii • EUB Decision 2004-027 (May 4, 2004)

ALBERTA ENERGY AND UTILITIES BOARD Calgary Alberta AQUILA NETWORKS CANADA (ALBERTA) LTD. 2000 POOL PRICE DEFERRAL ACCOUNTS PROCEEDING Decision 2004-027 REVIEW AND VARIANCE OF Application No. 1257976 DECISION 2001-92 AND DECISION 2001-93 File No. 1900-5-4 1 INTRODUCTION

The Alberta Energy and Utilities Board (Board) received two letters dated February 19, 2002 from Aquila Networks Canada (Alberta) Ltd. (ANCA or UNCA) requesting a review and variance (R&V) of Decision 2001-92 and Decision 2001-93.1 ANCA submitted that compliance with the Deferral Accounts Regulation and the setting of just and reasonable rates required the Board to vary Decisions 2001-92 and 2001-93 to remove the impacts of applying the “no-harm” test on ANCA’s capital structure, return on equity and income taxes.2 1.1 Decision 2001-92

1.1.1 Background Among the applications received in March of 2001, as part of the Omnibus 2000 Pool Price Deferral Accounts (PPDA or Deferral Accounts) Proceeding, the Board received an application from ANCA3 which sought approval of the December 31, 2000, Distribution Company (DISCO) PPDA balances for ANCA, originally established in Section 3 (c) of Decision U99099 for TransAlta Utilities Corporation (TransAlta). ANCA acquired the DISCO PPDA in its purchase of TransAlta’s distribution business, as approved by the Board in Decision 2000-41. ANCA also sought approval of carrying costs for the years 2000, 2001 and any further period over which the approved balance in the PPDA would be collected. ANCA requested approval of a three-year recovery period 2002-2004. TransAlta had been collecting the amounts in its 2000 DISCO PPDAs on an interim basis pursuant to the Board’s approval in Decision 2000-60, dated August 31, 2000. However, as a result of the enactment of the Deferral Accounts Deficiency Correction Regulation (Deferral Accounts Regulation),4 the owner of an electric distribution system was not allowed to collect under its distribution tariff or regulated rate tariff any amount in respect of its deferral accounts in the year 2001, pursuant to section 2 of the Deferral Accounts Regulation.

1 Aquila Networks Canada (Alberta) Ltd. (ANCA) was formerly UtiliCorp Network Canada (Alberta) Ltd.

(UNCA). UNCA’s name changed to ANCA effective May 31, 2002, following the release of Decisions 2001-92 and 2001-93. 2 Submission dated April 7, 2003 3 Application No. 2001058

EUB Decision 2004-027 (May 4, 2004) • 1

4 AR 240/2000, as amended by AR 6/2001. The Deferral Accounts Regulation has since been repealed and replaced by Part 2 of the Deficiency Correction Regulation, 2002, AR 53/2002.

http://www.eub.gov.ab.ca/BBS/decisions/utilitydecisions/2001/u2001-92.htm


http://www.eub.gov.ab.ca/BBS/decisions/utilitydecisions/1999/u99099.htm



Review and Variance of EUB Decisions 2001-92 and 2001-93 Aquila Networks Canada (Alberta) Ltd.

Further, with regard to 2001, the Board was required by section 4(1) of the Deferral Accounts Regulation to determine carrying costs for 2001 to be paid out of the Balancing Pool. Sections 4(1) and (2) specifically required the Board to do the following:

4(1) The Board must determine an amount that is payable in 2001 to the owner of an electric distribution system in respect of the cost of financing the amounts in the owner’s deferral accounts in 2001.

(2) In determining an amount under subsection (1), the Board must ensure that an owner is able to recover the prudent cost of financing the amounts in its deferral accounts, which may include debt financing, equity financing or a combination of debt and equity financing.

Due to the fact that the approved PPDA balances would be collected over a period extending beyond the end of 2001, the Board was also required to determine PPDA carrying costs for the period 2002 and beyond. The Board issued a number of separate decisions in relation to various aspects of the PPDA Proceeding. In Decision 2001-92,5 the Board set out its determinations with respect to capital structure and the prudent cost of financing the DISCO PPDAs, including ANCA’s DISCO PPDA. 1.1.1.1 Deferral Accounts Regulation In addition to reviewing the PPDA balances, the Board was also required by the Deferral Accounts Regulation to determine the associated final 2001 carrying costs that were to be received by the DISCO from the Balancing Pool. The Board specifically noted that section 4 of the Deferral Accounts Regulation required the Board to ensure that the owner of a DISCO was able to recover its prudent costs of financing the amounts in its PPDAs. The Board determined the requirements of section 4(2) of the Deferral Accounts Regulation were consistent with the exercise of the Board’s traditional regulatory jurisdiction with respect to assessing financing costs claimed by a regulated utility. To that extent, the Board determined that section 4(2) had not “superadded” conditions to the exercise of the Board’s traditional assessment of prudent utility costs.6 In assessing the prudent cost of financing the PPDA balances, the Board addressed the following issues in Decision 2001-92. 1.1.1.2 Stand-Alone Principle The Board found that it was appropriate to apply the stand-alone principle in the determination of the 2001 and onward carrying costs for the DISCO PPDAs. The Board noted that the principle was a fundamental concept of utility regulation and would be applied in this case.

5 Issued December 12, 2001

2 • EUB Decision 2004-027 (May 4, 2004)

6 Decision 2001-92, page 7


In the PPDA Proceeding, the question was raised as to whether the administration of DISCO PPDAs (or their “operations”) should be viewed as a stand-alone “operation” within the DISCO function or, alternatively, as a stand-alone “operation” within an integrated utility. The Board considered the relevance of this question as follows:

This question becomes relevant when determining the amount of equity that might be required to finance the 2000 deferral account operations. For example, the amount of equity that would be required to underpin the DISCO deferral account operations, in relation to a stand-alone DISCO corporate entity, is clearly different than the amount of equity required to underpin DISCO deferral account operations in relation to an integrated corporate entity.7

The Board referred to Decision U99099, noting that the impact of a deferral account on the business risk of an integrated utility is less than the impact of a deferral account on the risk of a Generation Company (GENCO) or Transmission Company (TRANSCO) on a stand-alone basis. The Board concluded that it would review the PPDA operations as “stand-alone” operations within the integrated utility and not as “stand-alone” within the DISCO function or “stand-alone” within the GENCO function.8 1.1.1.3 Applying the “No-Harm” Test for ANCA The notion of the “no-harm” test was raised in considering ANCA’s carrying costs. In Decision 2001-92, the Board observed that:

The Board approval of the sale of the DISCO by TransAlta to UNCA in Decision 2000-41 addressed this issue. In that Decision the Board concluded that, subject to certain conditions, customers would not be exposed to any immediate harm as a result of the sale, either in terms of rates or service. The DISCO having been transferred to UNCA, it is possible that UNCA may require a higher cost of financing for its deferral account balances than would TransAlta had the sale not occurred. The question is whether the possibility of higher carrying costs for UNCA may represent a potential “harm” to customers that must be mitigated in order to preserve the Board’s approval of the sale of the DISCO.9

The Board agreed with testimony on behalf of the utilities suggesting that the actual costs of financing was a blended cost of debt and equity and shareholders should be compensated for the equity they commit. However, the Board noted that the amount of underpinning equity that is required was dependent on whether the stand-alone deferral account was financed as a business unit within the DISCO operation or within the integrated utility operation. In considering the application of the “no-harm” test to ANCA, the Board noted that when it ratified the sale of the DISCO business to ANCA in Decision 2000-41, the Board determined that it would ensure that “no-harm” would come to consumers as a result of the sale. The Board did not consider that it was restrained by specifically foreseen harm that existed at the time of Decision 2000-41. In Decision 2001-92, the Board concluded that:

7 Decision 2001-92, page 27 8 Decision 2001-92, page 28 9 Decision 2001-92, page 29

EUB Decision 2004-027 (May 4, 2004) • 3


The Board does not agree with either UNCA or TransAlta that the Board’s conclusion in Decision 2000-41 that the three, specific, identified harms could be mitigated with appropriate conditions was a general conclusion with respect to all potential harms to which customers might be exposed as a result of the sale. In the pre-hearing conference in the DISCO sale proceedings, parties raised a number of areas of potential harm, all of which the Board considered could be dealt with in future proceedings given the Board’s ongoing regulatory role in relation to UNCA. For that reason and that reason alone, those issues were not considered in the Board’s assessment of the “no-harm” test. The Board considered that it could continue to protect customers on an ongoing, future basis given its regulatory responsibilities. The Board remains of the view that it has a responsibility, in the public interest, to ensure that UNCA’s customers are saved harmless from potential effects that arise after the sale was approved and closed. The Board considers that the relative difference between the financing costs of TransAlta and UNCA as they relate to the DISCOs are just such an issue. If the Board ignored this issue in this context, it would be ignoring its ongoing responsibility to ensure that UNCA’s customers are not harmed by the sale. 10

Having found that the “no-harm” test should be applied in this context, the Board then concluded:

Accordingly the Board considers that if the Board had not approved the sale of TransAlta DISCO operations to UNCA in Decision 2000-41, TransAlta Utilities could have financed UNCA’s DISCO deferral account operations on an integrated basis with less equity than was necessary for UNCA DISCO. If the Board finds the additional equity underpinning required for UNCA DISCO to be material, the sale of TransAlta DISCO operations to UNCA would result in injury and harm to customers unless the Board prescribes a remedy in this proceeding. For the reasons outlined earlier, the Board considers that it retains the discretion to do so notwithstanding its approval of the sale in Decision 2000-41.11

The Board also concluded that it must have regard to the “no-harm” test in the determination of ANCA’s carrying costs. However, the Board stated that it agreed with ANCA’s submission in the DISCO sale proceeding that customers “have no right to expect a level of regulatory certainty that they would [not] have had otherwise.”12 1.1.1.4 Relevant Time Period for the “No-Harm” Test The Deferral Accounts Regulation required the Board to determine prudent financing costs for the 2001 payable out of the Balancing Pool. The Board considered that it was required to determine prudent financing costs in the context of the regulatory framework established for DISCOs, including the application of the “no-harm” test.13 In the Board’s view, it was required to consider what time period the “no-harm” test ought to apply to ANCA.

10 Page 32 11 Page 33 12 Decision 2001-92, pages 31and 33; quoting Decision 2000-41, page 20 (NB: Omission of the word “not” is a

clerical error in Decision 2000-41)

4 • EUB Decision 2004-027 (May 4, 2004)



In that respect, the Board stated in Decision 2001-92:

At a minimum, the Board is of the view that the “no-harm” test should apply with respect to the year 2000 since this was the year that the sale of TransAlta’s DISCO to UNCA took effect. However, for 2000, the Board has based its award of carrying costs on the Board’s Interest Policy in IL 2000-01. On that basis, UNCA is not being awarded greater carrying costs than TransAlta would have been awarded had the sale not occurred. Therefore, in relation to 2000, the “no-harm” test is satisfied in the Board’s view. The crux of the issue faced by the Board is whether the “no-harm” test should also apply to UNCA during the “no recovery period” of 2001 and the Board determined recovery period. The Board considers that the issue needs to be addressed for the entire life of the 2000-year deferral accounts including the year 2001, even though the Balancing Pool is paying the carrying costs in 2001. Any funds that the Balancing Pool pays out results in less funds being available to the customers for other payouts for the benefit of customers. Therefore, the Board considers that for purposes of this Decision that the Balancing Pool payouts of 2001 carrying costs are the equivalent of customer funds. Accordingly, the year 2001 is equally subject to the “no-harm” test. Although the 2000 deferral accounts arise from circumstances that occurred in the year 2000, their impact extends beyond 2000 until they are fully collected. 14

On this basis, the Board determined that the “no-harm” test should apply to ANCA over the entire life of its PPDA operations; more specifically, until the PPDA balance was fully recovered. 1.1.1.5 Business Risk of the PPDAs The Board noted its approach to business risk in Decision U99099, in which it determined the business risk of TransAlta on an integrated utility basis and on a business function basis for the years 1999 and 2000. After examining a range of factors potentially affecting the risk associated with the PPDAs, the Board concluded as follows:

Having examined each of the business risk elements raised by Dr. Evans and the additional O&M business risk element identified by the Board, the Board concludes that, based on the business risks associated with the recovery of debt costs, and to a lesser extent the capital recovery risk, the 2000 deferral accounts require some minimal level of equity support.15

1.1.1.6 Appropriate Capital Structure based on Business Risk and Financial Risk The Board set out its determination of capital structure, based on its assessment of business risk, as follows in Decision 2001-92:

As a result, for the purposes of establishing an appropriate capital structure for DISCO 2000 pool price deferral account operations, the Board concludes that the business risk of the deferral accounts is significantly lower than the business risk of any of the three business functions of the integrated utility and, in particular, is significantly lower than the risk of the TRANSCO wires-only operation. Regardless of whether the TRANSCO or

14 Page 34-35 15 Decision 2001-92, pages 48-49

EUB Decision 2004-027 (May 4, 2004) • 5


DISCO wires-only operation is used as a point of reference or departure, the Board considers that the business risks of the 2000-deferral accounts are much less. Accordingly, the Board concludes that minimal levels of equity are required for the 2000 pool price deferral account operations. As noted earlier, the risks associated with debt and equity costs would suggest marginal equity support. However, the Board considers that, with the debt and equity cost risk mitigants put in place by the Board, the equity ratio required for deferral account operations would be in the order of 15% equity. The Board notes that this is in the order of magnitude with the upper limit of the credit enhancements suggested by Dr. Evans for an off-balance sheet approach and higher than the equity ratio recommended by the IFE.16

The Board thus concluded in a generic finding that, based on the evidence of Dr. Evans and the Independent Financial Experts (IFE) and given the very low business risk of the 2000 deferral account operations, an equity ratio of 15% reasonably reflected the business risk associated with the PPDAs. The Board noted that while the business risk analysis demonstrated that the required equity ratio was very low, the Board was required to also consider the impact of the low equity ratio on financial risk. Accordingly, the Board then went on to examine the financial risk of a deemed 15% equity ratio. However, in Decision 2001-92, the Board made the following critical assumption:

The Board notes that UNCA’s evidence was submitted in the context of the deferral account operations being financed within UNCA DISCO rather than on an integrated utility basis. Nevertheless, the evidence suggests that financial risk to the integrated utility is an important factor that the Board must consider in its assessment of the appropriate capital structure for financing the 2000 deferral accounts.17

As a result, the Board examined the impact of the deferral account operations in relation to ANCA as an integrated utility, instead of relative to ANCA as a DISCO. Based on this approach, the Board used TransAlta as a proxy for the reconstructed ANCA integrated utility. As a result, the Board concluded that a 15% equity ratio for the Deferral Accounts was sufficient to manage the financial risks of ANCA Integrated, i.e., the financial risks of ANCA on an integrated utility basis.18 Based on a consideration of ANCA’s business risk and financial risk and after application of the “no-harm” test, the Board determined that it would be appropriate and prudent to use the generic deemed capital structure of 85% debt and 15% equity for the ANCA DISCO PPDA for the period 2001 through the first quarter of 2002.19

16 Pages 53-54 17 Page 55 18 Decision 2001-92, pages 56-57

6 • EUB Decision 2004-027 (May 4, 2004)

19 Decision 2001-92, page 73. The Board was only concerned with determining an appropriate capital structure until the first quarter of 2002 because it was anticipated that a securitization financing of the then outstanding PPDA balances would be in place at a significantly lower carrying cost rate than would otherwise have been approved by the Board for the DISCOs.


EUB Decision 2004-027 (May 4, 2004) • 7

1.1.2 ANCA Request for Review and Variance of Decision 2001-92 By way of a letter dated February 19, 2002, ANCA requested an R&V of Decision 2001-92. This R&V Request was brought pursuant to section 57 of the Electric Utilities Act (EU Act) and rule 46 of the Board’s Rules of Practice. ANCA alleged that, in approving its PPDA carrying costs, the Board failed to comply with section 4 of the Deferral Accounts Regulation. Specifically, ANCA claimed that the Board failed to ensure that ANCA, as the owner of an electric distribution system, could recover its prudent costs of financing the amount in its DISCO PPDA. In particular, ANCA asserted that it was not “TransAlta or an integrated utility”, but was the owner of an electric distribution system and, as such, it was entitled to the protection of section 4 of the Deferral Accounts Regulation with respect to carrying costs for 2001. With respect to carrying costs in the first quarter of 2002, ANCA submitted that the Board failed to set rates that were just and reasonable as required by sections 51 and 52 of the EU Act. In ANCA’s view, the Board committed several errors of law and fact in Decision 2001-92, as follows:

• Erred in setting identical capital structures for all DISCOs when there were substantial differences and circumstances that clearly warranted different treatment for each of them.

• Erred in setting the capital structure for ANCA and others at 85% debt and 15% equity, when all evidence was that maintaining a 15% equity ratio would be impossible.

• Erred in its application of the stand-alone principle by failing to respect the definition of “owner” under the EU Act, by failing to respect the existence of distinct corporate entities, and by assuming the existence of an integrated utility even when such a utility, with Board approval, no longer exists.

• Erred in its application of the “no-harm” test by deeming ANCA to be part of a larger regulated entity including TransAlta which, with Board approval, no longer exists.

• Erred in disallowing ANCA recovery of a significant portion of the cost of financing the amounts in its PPDA in the absence of any finding of imprudence.

ANCA submitted that the essence of its objection to Decision 2001-92 was found in its opposition to the Board’s applications of the stand-alone principle and the “no-harm” test, which are interrelated in the case of ANCA. 1.2 Decision 2001-93

1.2.1 Background In Decision 2001-93,20 the Board dealt with three issues concerning ANCA’s income tax in relation to its Deferral Accounts. Specifically, the Board considered:

• Income tax rates to be used in the determination of before tax weighted average cost of capital (WACC) carrying costs rates.

• Procedures to deal with changes to Board approved income tax rates. 20 Issued December 22, 2001


8 • EUB Decision 2004-027 (May 4, 2004)

• Benefits and risks of deferring income tax. In considering the rates to be used in determining before tax WACC carrying costs, the Board noted ANCA’s submissions that as it would pay no federal tax in the year 2000 and 2001, no federal surtax would be payable. As a result, ANCA stated there was no surtax paid to be utilized to offset the Large Corporations Tax (LCT). The offset would only occur if the LCT were equal to or greater than the amount on the federal surtax. In dealing with the matter of the LCT and the federal surtax, the Board viewed ANCA as being an integrated utility for regulatory purposes. In this context, the Board deemed that ANCA would have ordinarily paid federal surtax in an amount that would have provided a surtax credit to fully offset any LCT otherwise incurred. The Board considered that for income tax purposes, based on the enactment of the Deferral Accounts Regulation, ANCA DISCO had a very strong case to claim the PPDA costs incurred as a deduction in computing taxable income in 2000 and to defer reporting the PPDA revenues until related billings were issued in the post-2001 period, thereby creating an income tax deferral. Consistent with the Board’s method of determining carrying costs on an integrated basis, the Board considered that the carrying cost benefits of income tax deferrals of ANCA should also be viewed on an integrated basis. The Board considered that this approach was consistent with the method used in Decision 2001-92, to determine ANCA’s after-tax WACC and apply the “no-harm” test. Applying this test to the potential benefit for income tax deferral, the Board stated:

The Board notes that UNCA has proposed that the benefits arising from income tax deferrals on their portion should go to UNCA customers. However, the Board concludes that it would be fair and consistent regulatory treatment to provide carrying costs benefits to UNCA’s customers respecting deferred income taxes only if these benefits would have been realized if TransAlta continued to own the DISCO. Any benefits in excess of what customers would have realized if TransAlta continued to own the DISCO should go to the benefit of UNCA. In the Board’s view, this conclusion is consistent with its approach to UNCA’s 2001 carrying costs in 2001-92 in light of the “no-harm” test.21

In keeping with the integrated approach, the Board noted that TransAlta incurred Deferral Account costs from January 1, 2000 to August 31, 2000 up until the acquisition of TransAlta’s distribution business by ANCA on September 1, 2000. Based on some TransAlta evidence, it appeared that TransAlta did not make a claim for the 2000 Deferral Account expenses in their 2000 tax filing. As a result, the Board determined that the entire amount of the TransAlta DISCO portion of the 2000 Deferral Account costs could be considered as a deduction to UNCA for income tax purposes in the year 2000 and in subsequent years, viewing UNCA on an integrated basis.22

21 Pages 81-82 22 Page 82


EUB Decision 2004-027 (May 4, 2004) • 9

The Board concluded that it was appropriate to transfer the income tax benefits of the deductions related to TransAlta’s Deferral Account costs to ANCA, given that TransAlta had not deducted the related Deferral Account expenses in their 2000 tax filing. Accordingly, the Board directed ANCA, in its refiling, to determine the benefits that would have arisen from claiming the full amount of the Deferral Account costs, including the TransAlta portion, in the year 2000. This action would allow the full year 2000 Deferral Account costs to be deducted for income tax purposes. 1.2.2 ANCA Request for R&V of Decision 2001-93 By way of a letter dated February 19, 2002, ANCA requested an R&V of Decision 2001-93. In regard to Decision 2001-93, ANCA requested that the Board review two distinct matters:

• The application of the stand-alone principle and the “no-harm” test in the calculation of the benefits of deferring income tax.

• The Board finding that ANCA, as viewed as an integrated basis, would not incur any federal surtax since any additional federal surtax payable from the deferral account operation could have been offset against ANCA’s LCT. Specifically ANCA submits the Board appears to have proceeded under the assumption that ANCA had applied to recover both the surtax and the LCT when it had not applied to recover the LCT with respect to the Deferral Accounts. The result of this misunderstanding is that ANCA is now not permitted to recover either the surtax or the LCT.

2 BOARD DECISION REGARDING AQUILA R&V

After consideration of ANCA’s R&V request regarding Decisions 2001-92 and 2001-93, the Board issued a letter dated February 21, 2003, advising parties participating in the R&V proceeding that it had made a determination that a substantial issue had been raised and as such the Board was prepared to grant a review hearing with respect to this specific issue in these decisions. The issue for which the Board granted a review was with respect to the application of the “no-harm” test in Decisions 2001-92 and 2001-93. Specifically, the Board determined that it was prepared to review the appropriateness of the use of the “no-harm” test in consideration of ANCA’s 2000 Pool Price Deferral Account application in both of these Decisions. In Decision 2001-92, the “no-harm” test was applied with respect to the calculation of ANCA’s carrying cost rates. In Decision 2001-93, the “no-harm” test was applied with regard to the calculation of the carrying cost benefit of deferred income taxes and the LCT. The Board established the following process for the review of the application of the “no-harm” test in Decisions 2001-92 and 2001-93:

(a) A written hearing process to consider the question of appropriateness of the use of the “no-harm” test in Decision 2001-92 and 2001-93.

(b) Should the Board determine that the “no-harm” test was in some way not used appropriately in Decision 2001-92 and 2001-93, separately, the Board may consider requesting submissions with respect to the impact that the partial or complete removal of


the “no-harm” test should have on the ultimate decision of the Board in each of these matters.

3 HEARING PROCESS

On March 17, 2003, the Board issued a Notice of Written Hearing and established the following written process to consider ANCA’s R&V of Decisions 2001-92 and 2001-93:

Submission by ANCA April 7, 2003 Argument by Interveners April 22, 2003 Reply Argument by ANCA May 5, 2003

The Board received a submission (Submission) dated April 7, 2003 from Bull, Housser & Tupper, on behalf of ANCA, in which it was stated that:

ANCA has not addressed the specific impacts of the adjustments that would follow from its recommendations in this submission but will do so at such time as the Board may direct.23

In a letter dated July 24, 2003, the Board notified ANCA that it would accept ANCA’s offer to provide additional information regarding potential adjustments, in order to ensure that it had received all of the relevant information. Accordingly, the Board requested ANCA to provide the additional information that it offered in the Submission, for the purpose of addressing the specific impacts of the adjustments that would follow from its recommendations in the Submission. In addition, the Board attached Board Information Request (IR) No. 1, which the Board requested ANCA to address in its response to be filed by August 7, 2003. Interested parties were given the opportunity to comment on ANCA’s Response to Board IR No.1 by no later than August 21, 2003. Following a request for extension of time by ANCA, in a letter dated August 5, 2003, the Board revised the deadline for receipt of submissions from ANCA to August 21, 2003, and submissions in reply to September 8, 2003. The Board received comments from the FIRM Group (FIRM) in respect of Board IR No. 1. In a letter dated November 12, 2003, the Board confirmed that following a review of ANCA’s Response to Board IR No. 1, it considered that ANCA had not fully provided all of the necessary information that the Board would require in order to determine potential adjustments to the capital structure of the PPDA operations, in the event that the Board decided to proceed with a variance of Decisions 2001-92 and 2001-93. Further, the Board stated that it considered that additional information was required to clarify the IR Response as submitted. Accordingly, the Board attached Board IR No. 2, requesting further information and clarification of ANCA’s Response to Board IR No. 1. The Board requested ANCA to respond by November 24, 2003. Interested parties were given the opportunity to comment on ANCA’s Response to Board IR No. 2 by no later than December 1, 2003. In a Board letter dated December 2, 2003, the Board confirmed that the deadline for ANCA’s Response to Board IR No. 2 was extended to December 1, 2003, following a request for additional time by ANCA. As a result, the deadline for the comments on ANCA’s Response was also revised to December 12, 2003. The Board received comments from FIRM in respect of Board IR No. 2.

10 • EUB Decision 2004-027 (May 4, 2004)

23 Aquila Submission of April 7, 2003, page 12, point number 65


By letter dated March 1, 2004, the Board notified ANCA that the income tax information presented in Board IR No. 2, BR.Aquila-8, was insufficient to allow the Board to make appropriate determinations on the income tax adjustment related to the LCT. Information Request BR.Aquila-8 had dealt with the adjustments that ANCA considered were necessary to remove the impacts of applying the “no-harm” test on ANCA’s income taxes, in the event that the Board decided to proceed with a variance of Decision 2001-93. Based on the need for additional information, the Board issued Board IR No. 3 to ANCA, in which it requested details concerning ANCA’s actual income taxes and the LCT incurred in 2000 and 2001. The Board requested ANCA to provide its response by March 12, 2004. Interested parties were given the opportunity to comment on ANCA’s Response to Board IR No. 3 by no later than March 19, 2004. The Board received no comments from interested parties in respect of Board IR No. 3. For the purpose of this Decision, the Board considers that the record of this hearing closed on March 19, 2004. 4 REASONS TO VARY - APPROPRIATENESS OF THE USE OF THE NO-

HARM” TEST

4.1 Views of the Parties

ANCA

In ANCA’s view, the Board through its application of the “no-harm” principle failed to ensure that ANCA could recover its prudent cost of financing the amounts in its Deferral Accounts in accordance with the Deferral Accounts Regulation and failed to set rates that were just and reasonable. ANCA submitted that the “no-harm” test had no application to determining ANCA’s prudent cost of financing or the appropriate determination of income tax. ANCA noted that historically the Board created the Deferral Accounts through Decision U99099. Following the creation of the PPDA, there was substantial growth in the Deferral Account amounts that occurred as the result of the dramatic and unanticipated increase in the cost of electricity. In June 2000, TransAlta filed an application for a rate rider of 25% of consumption for August 1, 2000 to recover the large deficit accruing in its Deferral Accounts. Shortly thereafter on July 5, 2000, the Board issued Decision 2000-41 approving the sale of the TransAlta DISCO to ANCA and stating “subject to certain conditions customers would not be exposed to any immediate harm as a result of this sale either in terms of rates or services”. ANCA noted that Decision 2000-41 did not deal with the Deferral Accounts as one of its conditions that were set. In August 2000, the Board approved the rate riders requested by ANCA, however on November 28, 2000 the Government released the Deferral Accounts Regulation, which prohibited the collection of the Deferral Accounts during the year 2001. In addition, the Deferral Accounts Regulation set out how carrying costs were to be determined and repaid, stating in section 4 that the Board must ensure that an owner was able to recover its prudent costs of financing the amounts in its Deferral Accounts. ANCA noted that at that time it was owner of the DISCO.

EUB Decision 2004-027 (May 4, 2004) • 11


ANCA observed that in Decision 2001-92, the Board identified a possible source of harm as being the high carrying costs, which might have been incurred. Specifically, ANCA would be incurring a higher cost of financing than TransAlta might have if the DISCO had not been sold. As such, the Board chose to analyze the Deferral Accounts as a separate stand-alone business within the totality of an integrated regulated utility, as it existed in the year 2000, for the purpose of ensuring that no harm would befall ANCA customers. ANCA submitted that the Board’s approach offended section 4 of the Deferral Accounts Regulation, which mandated that the Board must ensure the owner was able to recover the prudent cost of financing the amounts in its Deferral Accounts. ANCA further submitted that the Deferral Accounts Regulation did not permit the Board to calculate the carrying costs on the basis of an integrated regulated utility. In addition, ANCA stated that the evidence was clear that the costs were prudent and that as such they should have been recovered as claimed. In regard to the application of the “no-harm” test to Deferral Account carrying costs, ANCA stated that it was clear that in Decision 2000-41 the Board raised the issue of “no-harm” and in this regard properly applied it to the approval, setting 3 conditions designed to protect customers from potential adverse consequences of the particular reviewable transaction. ANCA also stated that it was also clear that the Board did not intend that the “no-harm” test should be used as an indefinite guarantee or should apply to the consequences of the restructuring of the electricity market as mandated by the EU Act. ANCA submitted that Decision 2000-41 clearly intended to protect against the consequences of the reviewable transaction, but not against the consequences of the policy of the EU Act. ANCA argued that the harm in this case arose from the actions of the Government in delaying recovery of the amounts in the Deferral Accounts, not from the reviewable transaction. ANCA submitted that the adoption of the “no-harm” test therefore lead the Board to err in Decision 2001-92 by reviewing the ANCA Deferral Accounts and related carrying costs as part of an integrated regulated utility, and as a result allowing ANCA to only recover a potion of its actually incurred carrying costs. Further, ANCA submitted that the adoption of the “no-harm” test lead the Board to also err in Decision 2001-93 by directing that income tax filings be based on a fictional integrated utility that did not exist, which was contrary to income tax law or practice. The FIRM Group The FIRM Group (FIRM) noted that it is important to refer to the commitments made by ANCA during the hearing that lead to the Decision 2000-41.24 Specifically, FIRM noted that in evidence ANCA guaranteed that rates would be no higher than they otherwise would have been if TransAlta was continuing to operate the DISCO. As a result, FIRM submitted that the Board application of “no-harm” in Decision 2000-41 must be viewed in light of such guarantees. FIRM submitted that the Board properly interpreted the Deferral Accounts Regulation and did not offend its terms by applying “no-harm” in the manner it did in Decisions 2001-92 and

12 • EUB Decision 2004-027 (May 4, 2004)

24 The FIRM Group consisted of the Alberta Urban Municipalities Association (AUMA), the Alberta Association of Municipal Districts and Counties (AAMDC), the Alberta Federation of REAs (AFREA), the Alberta Irrigation Projects Association (AIPA), the Consumers’ Coalition of Alberta (CCA) and the Public Institutional Consumers of Alberta (PICA).


2001-93. In addition, FIRM argued that nothing in the Deferral Accounts Regulation detracted from the Board’s discretion and power to carry out its duties to the public and customers. The Deferral Accounts Regulation was not meant to supplement the “no-harm” principle. FIRM stated that the cause of the harm was irrelevant to the issue of whether the “no-harm” principle should apply. The rationale for applying the “no-harm” principle was to ensure that customers were protected both initially from real or perceived harm such as those identified in Decision 2000-41, as well as from potential harm which was not foreseeable at the time of the application. In these Decisions, the Board assessed and allowed what it considered to be prudent costs. FIRM noted that ANCA purchased the TransAlta DISCO at a time when it was aware of the growing problems with PPDAs. In addition, FIRM stated that while ANCA claimed that at the hearing that resulted in Decision 2000-41, no one raised concerns with respect to PPDAs, it was ANCA’s responsibility to identify all the risks associated with purchase of the DISCO. This would include undertaking the risks related to the PPDA and the impact on financing needs in the event of delay of the collection. In this regard, FIRM noted that consumers did not know if ANCA had built these risks into its purchase price of the DISCO. As a result, this was a risk that ANCA should have identified. With regard to the federal surtax and the LCT in Decision 2001-93, FIRM submitted that ANCA has failed to raise a reasonable doubt as to the correctness of the Decision. ATCO Electric ATCO Electric Ltd. (ATCO) submitted that the Board’s adoption of the “no-harm” test in considering the prudent cost of financing for Deferral Accounts deprived ANCA of a significant portion of its prudently incurred carrying cost. ATCO submitted that the Board err ed in its application of the “no-harm” test and that it erred in its underlying determination that the Deferral Accounts operation are a separate stand-alone business unit within the totality of the integrated utility. ATCO stated that “no-harm” should not be extended to include matters not arising from the reviewable transaction. Neither the creation of the PPDA nor the delay in collecting same were the result of the sale of TransAlta DISCO to ANCA. ATCO further submitted that to impose on ANCA the risk of non-recovery of carrying costs and to impose upon ANCA the responsibility for costs, which have not arisen from the reviewable transaction, contravened the Deferral Accounts Regulation, the EU Act, and the principles of deregulation. Further, ATCO argued that the Board’s decision failed to consider the benefit that might have accrued to customers as a result of the sale. There is no indication that the Board weighed the potential positive and negative impact of the transaction to determine whether the balance favoured customers or at least left them no worse off. ATCO also stated that the calculation of carrying costs on the basis of a stand-alone business function was unreasonable since the EU Act did not provide for a Deferral Accounts business.

EUB Decision 2004-027 (May 4, 2004) • 13


TRANSALTA

TransAlta submitted that even if Decision 2000-41 lead the Board to properly apply the “no-harm” test to the Deferral Accounts, the Deferral Accounts Regulation was a subsequent intervening event, which ousted such considerations from continuing to be applicable. TransAlta further submitted that, in any event, it was not the sale, which created the Deferral Accounts. Prior to the sale and prior to the Deferral Accounts Regulation, TransAlta had established a rider to commence collection of the Deferral Accounts and as such no carrying costs were involved. As a result, ANCA inherited the Deferral Accounts rider upon the sale. The Deferral Accounts Regulation intervened in superceding the rider, giving rise to the carrying costs. TransAlta stated that no reasonable interpretation of “no-harm” conceived in Decision 2000-41 could apply to Deferral Account carrying costs. As a result, TransAlta submitted that the Board’s error in applying “no-harm” have lead it to err in its analysis of the appropriate carrying costs on the PPDA balances as well as the filing of income tax by ANCA. 4.2 Views of the Board The issue for review is set out in the Notice of Written Hearing, and that is the appropriateness of the use of the “no-harm” test in consideration of ANCA’s PPDA in both Decisions 2001-92 and 2001-93. If the Board determines that the use of “no-harm” was not appropriate in either or both Decisions, then the Decisions of the Board would be varied on the basis of a recalculation of a carrying cost in the case of Decision 2001-92 and a reconsideration of income taxes in Decision 2001-93, without the influence of the notion of “no-harm”. In Decision 2000-41, in approving the sale, the Board clearly considered the principle of “no-harm” and the complexities of its application within the evolving environment of electric industry deregulation. The Board stated “ …the Board also accepts that it must assess potential positive impacts on customers in light of the policy reflected in the EU Act, namely the unbundling of the generation, transmission and distribution components of electric utility service and the development of competitive markets and customer choice.”25 This recognition was similarly reflected by the Board in Decision 2001-92 when it found, “…the Board agrees with UNCA’s previous submission, in the TransAlta DISCO sale proceeding, that ratepayers and other stakeholders of the regulated business have a right to expect that they will not be injured by the transaction, but they have no right to expect a level of regulatory certainty that they would not have had otherwise.”26 These passages clearly indicate the Board’s awareness of the complexity of the use of the “no-harm” test in its traditional sense in a legislated environment of electricity deregulation. Decision 2000-41 sought to protect ratepayers from harm which was directly related to the “reviewable transaction”, but in so doing the Board must be mindful that it is not in effect shielding ratepayers from one of the consequences of deregulation to the detriment of the utility.


14 • EUB Decision 2004-027 (May 4, 2004)



In this case, the “harm” is the higher carrying costs which ratepayers might be asked to absorb as a result of presumably higher financing costs experienced by the DISCO on its own versus the potentially more favourable financing costs that the larger integrated utility would have incurred. The issue that this “harm” creates is whether it can be viewed as a direct consequence of the “reviewable transaction” or alternatively is it one potential consequence of deregulation. There is clearly an argument to suggest that, but for the sale of the DISCO, this “harm” would not exist, as the integrated utility would finance its Deferral Accounts at the more favourable financing cost rate, thereby avoiding the “harm”. In the Board’s view, however, this argument fails to consider the legislated environment of deregulation. Clearly, the legislature has mandated that the electricity marketplace is to become more competitive and less regulated. It has manifested this intention through the EU Act and the unbundling of various utility functions. Further, as a result of deregulation, by providing the environment for the distribution operation to become a stand-alone business, it follows that there will be differences (both positive and negative) for ratepayers from the old regulated framework as the newly unbundled entities carry on business into the future. As is the case with all business market forces, government regulation and other unforeseen developments will be encountered. As a result, businesses need to adapt and take the steps necessary to remain profitable and provide service. In certain instances, some of the steps taken will have consequences, which will be different than might have been the case under the regulated environment. This is to be expected. The Board has also analyzed the “no-harm” test from a somewhat different perspective. The Board considers that any invocation of the “no-harm” test would, by necessary implication, include a limitation of its effect based on a concept akin to the legal principle of remoteness. The common law recognizes that the liability that follows tortious conduct is not unlimited. The chain of cause and effect can only be followed to a point where the results would be fairly attributable to the act in the “context of social and economic conditions then prevailing and the reasonable expectations of members of the society in conduct with each other.”27 In this case, the Board is of the view that the reasonable expectation of the parties involved in the application leading to Decision 2000-41 in consideration of “no-harm” would not have contemplated the factors which contributed to the creation of the carrying cost and income tax issues considered in Decisions 2001-92 and 2001-93. As such, the Board is of the view that the “harm” that was considered in these Decisions was too remote. In summary, it is the Board’s view that upon carefully reviewing the subject Decisions and Decision 2000-41, it is clear that the principle of “no-harm” should not have been invoked in Decisions 2001-92 and 2001-93. Decision 2000-41 clearly and correctly intended to protect ratepayers from direct harm occasioned by the “reviewable transaction”. This did not, however, extend to the consequences, which the newly unbundled DISCO would encounter as it conducted business on an ongoing basis in a deregulated environment. In extending the “no-harm” test to the situation created by unexpectedly high pool prices and the intervention of Government delaying the collection of Deferral Accounts through the enactment of the Deferral Accounts Regulation, ratepayers were in effect provided a greater degree of regulatory certainty than they would generally be entitled to expect in a deregulated market. Further, the “no-harm” test was extended to circumstances, which were too remote.

27 Abbot et al v. Kasza [1976]4 WWR 20 at p 28 ACA

EUB Decision 2004-027 (May 4, 2004) • 15


16 • EUB Decision 2004-027 (May 4, 2004)

As such, the Board is satisfied that both Decisions 2001-92 and 2001-93 should be varied to allow for a determination to be made regarding carrying costs and income taxes absent consideration of the principle of “no-harm”. Parties have made submissions with respect to the imposition of the Deferral Accounts Regulation and the Board’s method of analysis used in the Decisions. Specifically, it has been suggested that the Deferral Accounts Regulation circumscribes the Board’s power to review carrying costs. The Board affirms the view expressed in Decision 2001-92 that the Deferral Accounts Regulation does not add or detract from the Board’s ability to review rates. Similarly, the Board rejects the suggestion that the form of analysis employed by the Board, i.e., assessing the costs of Deferral Accounts as if they were an independent business function, is contrary to the Deferral Accounts Regulation or the EU Act. 5 VARIANCE

5.1 Introduction Having determined that Decisions 2001-92 and 2001-93 should be varied by reconsidering the issue of carrying costs in Decision 2001-92 and Income Tax Deferral Benefit and LCT in Decision 2001-93, absent the principle of “no-harm” as it related to the sale approved by Decision 2000-41, the Board must first consider the appropriate evidentiary approach to be taken. Ideally, the findings of the original decision would simply need to be adjusted using the evidence presented in the original PPDA proceeding. This option is not available, however, as the evidentiary record from the previous PPDA proceeding is insufficient to allow for an appropriate analysis of the impact of the Deferral Accounts in relation to the ANCA DISCO. The Board notes that in its financial risk test of the impact of the Deferral Accounts in Decision 2001-92, whereby TransAlta was used as the proxy for ANCA Integrated, the analysis was primarily based on data from Decision U99099 in order to assess the impact on the integrated utility. Given the Board’s findings in this Decision, it is no longer appropriate to use the TransAlta proxy. Instead, it is necessary to use data, which allow an assessment of the impact of the Deferral Accounts in respect to the financial strength of ANCA DISCO. In addition, at the time of the original PPDA proceeding, the Board was faced with additional data constraints:

• During 2001, the period of the Deferral Accounts Proceeding, ANCA concluded a Negotiated Settlement of its 2001 Distribution Tariff (DT) matters. As a result, during 2001 only limited financial information was available related to the DISCO.

• For this reason, while Appendix 1 of Decision 2001-92 presented an alternative analysis showing the impact of the Deferral Accounts on the DISCO, the Financial Risk Test did not use much in the way of 2001 ANCA DISCO data.

• In 2001, the capital structure of the integrated utility was used as a proxy for the capital structure for the DISCO, since at the time there was no litigated capital structure for the DISCO.

• In addition, in 2001, while some of ANCA’s Deferral Account financial information was available, not all of the financial statement items related to the PPDA were known.


Based on the insufficient evidentiary record from the original PPDA proceeding, the Board was concerned about the overall integrity of the data at the DISCO level, as well as at the Deferral Account level. The Board considered that, for the reasons cited above, in the pursuit of obtaining the best information available, it was necessary to request additional information from ANCA in order to effectively perform a financial risk test at the DISCO level. Faced with this unique set of circumstances, the Board determined that the fairest and most equitable approach would be to obtain actual data for ANCA’s Deferral Account and DISCO operations. As a result, the Board issued several information requests, Board IR No. 1, IR No. 2 and IR No. 3, to obtain all the relevant information to perform the financial risk test and determine any potential adjustment based on the removal of the “no-harm” test. By obtaining actual data, the Board was in a position to use the best available information to analyze the overall impacts and make any adjustments necessitated by its decision to vary. 5.2 Background

ANCA submitted that compliance with the Deferral Accounts Regulation and the setting of just and reasonable rates required the Board to vary Decisions 2001-92 and 2001-93, for the purpose of removing the impacts of applying the “no-harm” test on ANCA’s capital structure, return on equity and income taxes, including the federal surtax. As a result, ANCA submitted that the total PPDA cost adjustments amounted to $14.6 million, based upon the individual carrying cost and income tax adjustments indicated in Table 1 below. ANCA’s proposed adjustments are presented in Sections 5.3 and 5.4. Table 1. ANCA Submitted PPDA Cost Adjustments – Decisions 2001-92 and 2001-93

PPDA Cost Adjustments ($ 000) Decision 2001-92 Adjustments to 2001 Carrying Costs 8,817 Adjustments to 2002 Carrying Costs 5,155 Total Adjustment for Decision 2001-92 13,973 Decision 2001-93 Adjustment to Carrying Cost Benefit of Deferred Income Taxes for 2001-2002 (1,022) Adjustment to Large Corporations Tax for 2000-2001 1,644 Total Adjustment for Decision 2001-93 622 Total Adjustment for Decisions 2001-92 and 2001-93 14,595

5.3 Decision 2001-92

5.3.1 Carrying Cost Determination

5.3.1.1 Views of the Parties

ANCA In Part 1 of ANCA’s Response to Board IR No. 1, ANCA presented Schedule A which calculated the WACC assuming a 60%/40% debt/equity ratio, leaving all else the same as provided in Appendix A in Decision 2001-92. The resulting WACC for the portion of the adjustment period in 2001 was 10.31%, and for the 2002 portion was 8.85%.

EUB Decision 2004-027 (May 4, 2004) • 17


In the Board IR response, ANCA also presented Schedule B, which calculated the recommended adjustment to the carrying costs, using the WACC rates noted above, and incorporating the Board’s specifications noted in Part 4 of the information request. ANCA noted that Schedule B was formatted similarly to Schedule A in Decision 2001-93, and used data from Schedules 2-B and 2-C of ANCA’s Refiling #4 dated May 13, 2002, which was the basis for the approvals of the carrying costs in Decision 2002-054, the Omnibus Decision.28 ANCA estimated that the difference between the adjusted and approved carrying costs for 2001 was $8,817,000 (line 15, Schedule B 2001) and for January 1 – August 15, 2002, was $5,155,000 (line 15, Schedule B 2002). The sum of these two amounts, $13,973,000, represented ANCA’s recommended adjustment to the PPDA carrying costs. ANCA concluded that the evidence submitted in its Response to Board IR No. 1 demonstrated that the necessary and appropriate capital structure for the PPDA prior to securitization was 60%/40% debt/equity. Based on this structure and assuming all else was left unchanged from the Board’s prior decisions, the additional carrying costs that ANCA should be allowed to recover was $13,973,000. This was determined as the difference between the carrying costs for 2001 and 2002 approved in Decision 2002-054 (based on the approvals in Decisions 2001-92 and 2001-93), and the “adjusted” carrying costs. ANCA proposed that the additional carrying costs of $8,817,000 related to 2001 represent a final adjustment or reconciliation of the carrying costs for 2001. Accordingly, ANCA recommended that it was appropriate that the Balancing Pool pay these amounts in the same manner as it paid previous Board determinations of the 2001 PPDA carrying costs. With regard to the additional carrying costs of $5,155,000 related to 2002, ANCA recommended the mechanism to collect the amount from consumers be determined in conjunction with the true up mechanics that are required in any event, in accordance with the Terms Sheet approved in Decision 2002-054. In the Board’s IR No. 1 to ANCA, the Board originally requested that ANCA provide the additional information that it offered in the Submission dated April 7, 2003, for the purpose of addressing the specific impacts of the adjustments that would follow from its recommendations in the Submission. In addition to any of the information that ANCA was to provide, the Board considered that it would be helpful to the Board for ANCA to include the following information:

1. The methodology used to establish the financial risk test (i.e., a financial risk test to determine the financial impact of the Deferral Accounts respecting ANCA, similar to the test presented in Decision 2001-9229) and to calculate the recommended adjustments.

2. ANCA’s calculation of its recommended adjustments, including all supporting details

and working formulae used in determining said adjustments, given the Board’s original determinations in Decision 2001-92 regarding cost of capital and capital structure.

In Part 1 of ANCA’s Response to Board IR No. 1, ANCA submitted that the financial risk tests applied by ANCA were similar to the one presented in Decision 2001-92, with the exception that they were necessarily based on information relevant to ANCA’s actual operations, rather than

28 Issued June 19, 2002.

18 • EUB Decision 2004-027 (May 4, 2004)

29 See Section 5.9.1 of Decision 2001-92

http://www.eub.gov.ab.ca/BBS/decisions/utilitydecisions/2002/2002-054.htm


information for a virtual integrated utility. The risk tests applicable during the “adjustment period” were shown on Schedule G. In Part 2 of ANCA’s Response to Board IR No. 1, ANCA noted that Schedule G, which showed the Interest coverage ratios for ANCA on a “stand-alone” basis, included the distribution and deferral account operations. Given that the capital structure of distribution operations is necessarily at the regulated 60%/40% debt/equity ratio, and that ANCA had to finance the two parts as part of its total capital requirements prior to securitization, the deferral account capital structure would be the same. Thus, in Part 3, ANCA submitted that it assumed that the capital structure of the Deferral Accounts during the period January, 2001 through to securitization was a debt/equity ratio in the 60%/40% range - the same as the target range of the regulated entity. ANCA argued that this was a reasonable and necessary assumption, given that there was only one set of financial tests and covenants with creditors for ANCA. ANCA noted that prior to June 2001, it was significantly in breach of some of its covenant ratios and was facing the possibility of default on its third party debt.30 In Part 3, ANCA indicated that during this period, the substantial emergency funding by ANCA's parent to fund the deferral account caused debt to be significantly more than 60% of the capital structure. However, inter-company debt was considered equity from a credit perspective (i.e., under the bank credit agreement outstanding until June, 2001, ANCA needed and was able to obtain temporary waivers that excluded inter-company debt from the definition of debt). ANCA further indicated that up to June 2001, it required waivers from the banks to avoid being in breach of its existing loan facility resulting from the increased debt needed to fund the deferral account. In order to achieve and maintain coverage ratios acceptable to the banks in the new financing in June 2001, UtiliCorp Networks Canada Ltd. (ANCL or formerly UNCL), ANCA DISCO’s parent company, injected $105 million of new equity to bring the debt/equity ratio into the 60%/40% range which effectively lowered interest costs. ANCA also noted that the new bank facility had no Debt/EBITDA test but instead had a number of tests and covenants, the governing one of which was the Interest Coverage Test, which was the test applied in Schedule G. ANCA noted that its actual debt/equity ratio after the June 2001 infusion of equity was approximately 60%/40%, resulting in improved coverage ratios. In its request, BR.Aquila-1 in Board IR No. 2 to ANCA, the Board noted that in Board IR No. 1, the Board stated the following with regard to the appropriate approach to methodology:

With regard to the methodology, the Board considers that an approach should be provided which is similar to that taken by the Board in Decision 2001-92, in which it treated the Deferral Account operations as a separate business operation or “stand-alone” operation, with separately identifiable business risk. For the purpose of this request, the Deferral Accounts should be viewed as a separate business operation within the context of [ANCA] as a DISCO.31

30 Part 1 31 See Sections 5.2 and 5.9 of Decision 2001-92 as well as Appendix 1 in the Decision. In Decision 2001-92, the

Board treated the Deferral Accounts as a separate business operation, but viewed the Deferral Accounts as a “stand-alone” operation within the context of Aquila as an Integrated Utility, and applied the “No-Harm” test on this basis.

EUB Decision 2004-027 (May 4, 2004) • 19


20 • EUB Decision 2004-027 (May 4, 2004)

The Board noted that in its response to Board IR No. 1, ANCA had presented Schedule G to demonstrate the financial risk test that ANCA considered applicable to determine the financial impact of the Deferral Accounts. However, the Board further noted that, similar to Exhibit No. 381 in the PPDA proceeding, Schedule G did not provide a separate break down of the Deferral Account operations. As a result, Schedule G was not treating the Deferral Account operations as a separate business operation or “stand-alone” operation within the context of ANCA as a DISCO, as originally requested in Board IR No. 1 and as presented in Appendix 1 of Decision 2001-92. Consequently, in BR.Aquila-1, the Board requested ANCA to recast Schedule G, page 2 of 2, breaking out the Deferral Account operations separately from the DISCO operations. The recast Schedule G table was to include the following information:

• All of the items shown in Schedule G, page 2 of 2, should be provided for (1) the DISCO operations, (2) the Deferral Account operations, and (3) the consolidation of the DISCO and Deferral Account operations, for the period under review.

• The financial risk test (i.e., the calculated interest coverage ratios) should be provided for (1) the DISCO operations, (2) the Deferral Account operations, and (3) the consolidation of the DISCO and Deferral Account operations. The format of this information in the recast table should be similar to the Board’s presentation in the right hand side of Appendix 1 in Decision 2001-92.

• The financial risk test and compliance with the minimum interest coverage ratios should assume the following debt to equity ratios for the Deferral Account operations: 85%/15% debt/equity, 80%/20% debt/equity, 75%/25% debt/equity, 70%/30% debt/equity, 65%/35% debt/equity and 60%/40% debt/equity.

In BR.Aquila-1, ANCA submitted Schedule H, which demonstrated what the actual ANCA EBITDA to Interest coverage ratios would have been, similar to Schedule G, but for only the regulated DISCO and only the PPDA operations, first separately and then for the combined operations. ANCA noted that Schedule H showed ANCA’s portion of the PPDA, which was consistent with the previously filed Schedule G, but also provided the TransAlta component, in order to provide the complete information pertaining to the entire regulated DISCO with PPDA operations. As a result, Schedule H showed what the actual EBITDA to Interest ratios for the regulated DISCO and PPDA operations would have been had the portion TransAlta financed been included at the same debt/equity ratio as the ANCA portion. ANCA noted that it used the PPDA balances from its Schedule B for these illustrative calculations, while Schedule G from its Response to Board IR No. 1 would have used the “deferral balances” per the financial statements, which included other deferral accounts such as transmission related amounts. Although those other deferrals would have affected the covenants of the utility operations at any given time, ANCA believed it was appropriate to use only the final PPDA amounts for the ‘deferral operations’ component in this request. This was based on ANCA’s understanding that this request was intended to isolate the PPDA and distribution components in order to provide an analysis of the impact of the PPDA on the regulated DISCO operations. ANCA noted that while the other (e.g., transmission) deferrals also formed part of the regulated DISCO operations, they were dealt with separately in different applications, wherein carrying costs specific to those amounts were established.


ANCA submitted Schedules I (a) through (f) (shown in Appendix 1 of this Decision), which responded to BR.Aquila-1 and provided the EBITDA to Interest coverage ratios32 for the DISCO, PPDA, and combined operations, using the requested debt/equity ratios for the entire Deferral Accounts. ANCA noted that Schedules I(a) – (f) treat the entire PPDA the same, meaning the requested debt/equity ratios apply to the entire deferral amount, including both ANCA and TransAlta’s portions. ANCA stated that it was clear from the schedules that the Deferral Accounts had a significant impact on the interest coverage ratios and that a higher debt component reduces the interest coverage. At the same time, ANCA confirmed that the financial risk tests calculated in Schedules I(a) – (f) showed that interest coverage ratios for Composite ANCA (or the Composite DISCO), defined as the combination of ANCA DISCO and the DISCO PPDA operations, were above the minimum required interest coverage ratios under ANCA’s credit facilities for all periods other than the quarter ending June 2002. However, ANCA considered that these tests also demonstrated that this ratio has been eroded by the impact of financing the Deferral Accounts. As a result, the ANCA DISCO interest coverage ratio was much more robust than the Composite ANCA ratio in all periods. ANCA stated that the fact that the Composite ANCA ratio was not below the minimum ratio required under ANCA’s credit agreements was not proof by itself of financial strength. ANCA argued that no company intentionally wants to “live on the edge” of its coverage ratios. Being in default of a credit facility should not be viewed as the only test of whether or not ANCA’s Deferral Accounts were appropriately funded with debt and equity. In addition, proper debt and equity levels should not put the company in a position to potentially breach its covenants with an unexpected event. ANCA stated that had its floating interest rates increased, had revenues dropped unexpectedly or had the recent regulatory decision on its depreciation rates taken effect in 2001, ANCA could have breached its interest covenant test under the Composite ANCA scenario. Accordingly, ANCA argued that even though, in hindsight, it would not have breached its interest coverage covenants under any of the debt/equity scenarios, in each of the scenarios up to 70% debt / 30% equity, the interest coverage ratio was close enough to the covenant to put the utility at risk. ANCA stated that in June 2001, in order to refinance the Deferral Accounts, it replaced its emergency inter-company loan from its parent with a negotiated $150 million credit facility and $105 million of new equity. This new credit facility was predicated on a 60%/40% financing of the ANCA Deferral Account balance, a level that lenders determined was necessary to support the new facility. ANCA further stated that if the Deferral Accounts had been financed with a lower percentage of equity, the lenders and bond raters would have viewed ANCA’s credit as weaker and would have demanded a higher interest rate on this facility.

32 EBITDA is calculated as the sum of debt return (interest expense), equity return (net income), income tax and

depreciation expense. EUB Decision 2004-027 (May 4, 2004) • 21


In BR.Aquila-3(a), ANCA stated that its credit facilities required the interest coverage covenant to be calculated based on a rolling 12 month period, which was the method used in Schedule G from its Response to Board IR No. 1. ANCA indicated that based on its experience, lenders generally used rolling 12-month periods rather than calendar year-to-date figures to calculate coverage ratios. Since ANCA began operations September 1, 2000, for each of the quarters up to June 30, 2001, the cumulative column in Schedule G represented the cumulative amounts since September 1, 2000. For quarters subsequent to June 30, 2001, a full 12-month rolling period was used. In BR.Aquila-4(a), ANCA noted that the treatment/calculation of interest expense for the interest coverage ratio in Schedule G changed, since a new facility was created in the second quarter of 2001 that had new and more restrictive coverage tests. From the period September, 2000 to February, 2002 when it was repaid, ANCA had a syndicated bank loan (the “Bridge Facility”) outstanding that contained an interest coverage covenant calculated in the manner shown in the columns up to March 31, 2001 on Schedule G (i.e., inter-company interest expense was not included in the calculation of EBITDA and interest). ANCA noted that from June 2001 up to the date of securitization of the Deferral Accounts, ANCA had a separate credit facility (the “Credit Facility”) that contained an interest coverage covenant calculated in the manner shown in the columns from June 30, 2001 to June 30, 2002 on Schedule G (i.e., inter-company interest expense was included in the calculation of EBITDA and interest). In June 2001, ANCA also borrowed a $230 million inter-company loan (the “Inter-company Loan”) from Aquila Networks Canada Limited Partnership. Since the Inter-company Loan was a significant part of ANCA’s total debt, inter-company interest was included as part of the covenant for the Credit Facility. ANCA noted that the June 30, 2001 covenant calculation on Schedule G reflected the covenant under the Credit Facility, which treated inter-company interest expense differently than under the Bridge Facility. From June 30, 2001 until February 2002 when the Bridge facility was repaid, ANCA provided interest coverage covenants to its lenders for the Bridge Facility that followed the same form as the calculations on Schedule G up to March 31, 2001. ANCA confirmed that these calculations were not explicitly provided on Schedule G since the new facility had a more stringent coverage test and, accordingly, Schedule G reflected this since ANCA was required to meet this more rigorous test (i.e., if ANCA passed this test, it passed the original test under the Bridge). FIRM

FIRM provided comments on ANCA’s Response to Board IR No. 1. FIRM submitted that it continued to believe that the Board approach to the “no-harm” test was appropriate. FIRM submitted that the information provided by ANCA in its IR response did indicate that ANCA was able to avoid non-compliance with major financial covenants through temporary waivers and the parent company injecting new equity.33 FIRM noted that, viewed as an integrated utility (virtual or otherwise), ANCA was capable of handling the financing obligations arising from these Deferral Accounts.

22 • EUB Decision 2004-027 (May 4, 2004)

33 ANCA’s Response to Board IR No. 1, Part 3(6)


FIRM provided comments on ANCA’s Response to Board IR No. 2. FIRM noted that in the response to BR.Aquila-1, ANCA provided Schedule I(a)-(f) which provided the EBITDA to Interest ratios for the distribution, PPDA, and combined operations, using the requested debt/equity ratios for the entire Deferral Accounts. The debt/equity ratios in these schedules started at 85%/15% and ended at 60%/40%. FIRM noted ANCA’s comments regarding the results of Schedules I(a)- (f):

The financial risk tests calculated in Schedules I(a) – (f) show interest coverage ratios for Composite ANCA with PPDA that are above the minimum required under ANCA’s credit facilities for all periods other than the quarter ending June 2002.34

FIRM submitted that this evidence clearly showed that ANCA had not suffered any “harm” from the Board’s order of a debt/equity ratio of 85%/15% up to the point of final securitization of the outstanding Deferral Account balances. FIRM argued that the PPDA was an exceptional event that should not fall under the normal WACC of the utility, as being claimed by ANCA in the R&V. FIRM further stated that in applying the “No Harm” test to protect consumers, the Board did not harm ANCA. Specifically, ANCA had the capability to finance the outstanding Deferral Account balances and to not infringe the minimums required for ANCA’s credit facilities. FIRM concluded that it would be unfair to consumers to further compensate ANCA for a deemed debt/equity structure when they were capable of financing the PPDA with an 85%/15% debt/equity structure. FIRM further provided comments regarding ANCA’s overall response in BR.Aquila-1.35 FIRM responded that while all of the possible scenarios that ANCA had described may or may not have occurred, the fact was that ANCA was able to weather the storm. As a result, FIRM submitted that it would not be appropriate to now provide an additional return to shareholders when it clearly was not needed. FIRM further concluded that the Board’s decision to set the capital structure at a debt/equity ratio of 85%/15% has been proven to be the right decision. Thus, FIRM submitted that the PPDA was an exceptional circumstance that was required to be financed as effectively and efficiently as possible, and that has been achieved. Accordingly, FIRM submitted there should be no variation to Decisions 2001-92 and 2001-93 in this regard. 5.3.1.2 Views of the Board In Decision 2001-92, the Board determined that a deemed capital structure of 15% common equity and 85% debt was prudent for the Deferral Account operations. In its determination, the Board conducted financial risk analysis to determine the impact of the 15% equity ratio for the PPDA operations on the financial risk of the DISCOs.36 Given that the Board had determined that it must have regard to the “no-harm” test in the determination of ANCA’s carrying costs, the Board considered in Decision 2001-92 that the financial risk test should be applied in the context of the integrated utility, as opposed to ANCA’s PPDA evidence, which was submitted in the context of the DISCO operations.37

34 BR.Aquila-1, page 3 35 Pages 3-4 36 See Section 5.9.1 of Decision 2001-92 37 Page 55

EUB Decision 2004-027 (May 4, 2004) • 23


Based on its overall objective, the Board stated in Decision 2001-92:

The IFE submitted that there is “an ability that exists from time to time to stretch, if you like, to expand the debt borrowing capacity, particularly where you are dealing with an increase in a particular type of asset which is, in our mind, one that requires a lower level of equity to support the financing thereof.”38 In light of this evidence, the Board considers it important to determine whether it would be possible to stretch the balance sheet of the integrated utility for the relatively short duration of the deferral accounts without causing financial harm to the integrated operations. The Board considers that this approach should be investigated particularly in the light of statements of both AE and UNCA that they do not regard the deferral account operations as “investment opportunities”. However, the Board considers that if it were to allow any stretch, the stretch should not cause financial harm by way of significant reductions to interest coverage ratios or violations of covenants (e.g. increases to “total debt to EBITDA” ratios above 3.75) for integrated utility operations.39

In Appendix 1 of Decision 2001-92, the Board tested the on-balance sheet financial impact of Deferral Account operations respecting ANCA integrated utility operations giving consideration to two financial indicators, Before Tax Interest coverage ratios and Total Debt to EBITDA ratios, for the years 2001-2003. In the financial risk test, the Board used TransAlta as a proxy for the ANCA integrated utility. The Board emphasized that it was performing these financial tests to determine whether the Board’s preliminary finding of a 15% equity ratio for the business risk of the PPDA would be sufficient to manage the financial risks of the integrated utility. Based on its financial risk test, the Board concluded that it was satisfied that a stretch of the ANCA Integrated balance sheet using a 15% equity underpinning for Deferral Account operations would not cause a significant change to Before Tax Interest coverage ratios. Further, the Board noted that, for the most part, total debt to EBITDA covenant ratios would be maintained close to or below the “prudent” ratio of 3.25. However, given the Board’s current determination in Section 4.2 of this Decision to remove the impact of applying the “no-harm” test on ANCA’s carrying costs for the Deferral Accounts, the Board will need to re-examine if, after removing the “no-harm” test, it is still appropriate and prudent to continue to use the generic deemed capital structure of 85% debt and 15% equity for the ANCA DISCO PPDA for the period 2001-2002 up until the point in time of securitization. In particular, the Board will need to revisit the financial risk test once more to determine the financial impact of the 15% equity ratio for the PPDA operations on the financial risk of the Composite DISCO operations (or Composite ANCA, defined as the combination of ANCA DISCO and the DISCO PPDA operations), as opposed to the original financial risk test in Decision 2001-92 in which the Board determined the impact of the 15% equity ratio for the PPDA operations on the financial risk of the integrated utility. As a starting point, the Board considers that its overall mandate with respect to the financial risk test has not been altered in this Decision relative to Decision 2001-92. Similar to the general objective discussed in Decision 2001-92, the Board considers it is important to determine whether it would be possible to “stretch the balance sheet” of the Composite DISCO or

38 Transcript, page 6244 (emphasis added)

24 • EUB Decision 2004-027 (May 4, 2004)

39 Page 55


Composite ANCA (as opposed to “stretching the balance sheet of ANCA Integrated”) for the duration of the Deferral Accounts without causing financial harm to the Composite DISCO operations. However, the Board considers that if it were to allow any stretch, the stretch should not cause financial harm by way of significant reductions to interest coverage ratios or violations of related covenants for Composite DISCO operations. Based on this overall mandate, the Board will now review the evidence presented by ANCA in this proceeding. The Board notes that Board IR No. 1 to ANCA requested that ANCA provide the additional information that it offered in the Submission dated April 7, 2003, for the purpose of addressing the specific impacts of the adjustments that would follow from its recommendations in the Submission. Further, the Board requested ANCA to incorporate the methodology used to establish the financial risk test (i.e., a financial risk test to determine the financial impact of the Deferral Accounts respecting ANCA, similar to the test presented in Decision 2001-9240) and to calculate the recommended adjustments. In Part 1 of ANCA’s Response to Board IR No. 1, ANCA submitted that the financial risk tests applied by ANCA were similar to the one presented in Decision 2001-92, with the exception that they were necessarily based on information relevant to ANCA’s actual operations, rather than information for a virtual integrated utility. The risk tests applicable during the “adjustment period” were shown on Schedule G. However, the Board noted that, similar to Exhibit No. 381 in the PPDA proceeding, Schedule G did not provide a separate breakdown of the Deferral Account operations. As a result, Schedule G did not treat the Deferral Account operations as a separate business operation or “stand-alone” operation within the context of ANCA as a DISCO, as originally requested in Board IR No. 1 and as presented in Appendix 1 of Decision 2001-92. Instead, ANCA assumed that the capital structure of the Deferral Accounts was in the 60%/40% range, the same target range of the regulated DISCO operation. Consequently, in Board IR No. 2, BR.Aquila-1, the Board requested ANCA to recast Schedule G, page 2 of 2, breaking out the Deferral Account operations separately from the DISCO operations. Further, the Board directed ANCA to use alternative debt to equity ratios for the Deferral Account operations ranging from 85%/15% to 60%/40%. ANCA responded to the Board’s request to conduct a new financial risk test, submitting Schedules I (a) through (f) in BR.Aquila-1. Similar to Schedule G, ANCA applied the Interest Coverage Test, since it was the governing test that was used in the Credit Facility (i.e., the bank credit facility which was put in place in June 2001 and remained up until the date of securitization of the Deferral Accounts).41 ANCA provided the EBITDA to Interest coverage ratios for the Distribution, PPDA, and Composite ANCA, using the requested debt/equity ratios for the Deferral Accounts. The Board notes ANCA’s conclusion that the results of the financial risk tests calculated in Schedules I(a) – (f) showed interest coverage ratios for Composite ANCA that were above the 40 See Section 5.9.1 of Decision 2001-92 41 See Part 3(6) in Aquila’s Response to Board IR No. 1 and BR-Aquila-4(a) in Aquila’s Response to Board IR

No. 2. The interest coverage test was also provided to lenders in the Bridge Facility (the syndicated bank loan in place from the period September 2000 to February 2002). However, the Credit Facility had a more stringent coverage test.

EUB Decision 2004-027 (May 4, 2004) • 25


minimum required interest coverage ratios under ANCA’s credit facilities for all periods other than the quarter ending June 2002. The Board observes that the schedule that ANCA is specifically referencing to make this overall conclusion is Schedule I(a), the schedule which presents the financial covenant tests in the scenario assuming an 85%/15% debt/equity ratio for the PPDA operations. The Board considers Schedule I(a) to be of particular interest since it illustrates the financial risk test using an assumed 85%/15% debt/equity ratio for the Deferral Accounts, which is the same as the deemed capital structure for the PPDA as determined in Decision 2000-92. As a result, it is critical to review the results of the financial risk test for Schedule I(a). If the financial risk test passes in the scenario assuming an 85%/15% debt/equity ratio for the PPDA operations, then it is evident that the financial risk test will also pass in all of the other remaining scenarios, i.e., Schedules (b) – (f), since they include increasing equity ratios for the Deferral Accounts. On the other hand, if the financial risk test does not pass in the scenario assuming an 85%/15% debt/equity ratio for the PPDA, then it will be necessary to consider higher equity ratios for PPDA operations, since additional equity is required in order to support the Composite DISCO operations. With regard to the minimum required interest coverage ratios under ANCA’s credit facilities, in Schedule G and in BR.Aquila-4(d)(i), ANCA presented the minimum required ratios, which were revised as a result of changes in financing arrangements. As stated in BR.Aquila-4(d)(i):

As described in BR-Aquila-4 (a)(i), ANCA’s Bridge Facility was outstanding from September 1, 2000 until February 2002. The interest coverage covenant under this facility was 3.75 to 1, and was the basis for Exhibit 381. ANCA’s Credit Facility was taken out in June 2001. Its interest coverage covenant was 3.25 to 1 for the period up to March 31, 2002 and 3.75 thereafter, and was the basis for Schedule G, columns June 30, 2001 and onwards.

Based on the minimum required interest coverage ratios, the Board notes ANCA’s statement that the financial risk tests calculated in Schedules I(a) – (f) showed interest coverage ratios for Composite ANCA that were above the minimum required interest coverage ratios under ANCA’s credit facilities for all periods other than the quarter ending June 2002. In the quarter ending June 2002, Schedule I(a) showed that the EBITDA to Interest covenant ratio was 3.6 times, which was less than the minimum required coverage ratio of 3.75 times. However, the Board notes that in Schedule I, ANCA has presented compliance checks that have been based on the individual 3-month periods. The Board further notes that this compliance test is not consistent with the test that was required by ANCA’s credit agreements. The Board notes that in BR.Aquila-3(a), ANCA confirmed that its credit facilities required the interest coverage covenant to be calculated based on a rolling 12 month period, which was the method used in Schedule G from its Response to Board IR No. 1. Further, in BR.Aquila-4(c)(iii), ANCA confirmed that compliance checks are not made for individual 3-month periods because the credit agreements in place during the periods in question did not require calculations on that basis. Interest coverage compliance checks were all based on 12 month rolling amounts, or shorter periods if a full 12-month period was not available. As a result, the Board considers that it is necessary to recast the financial risk test results for Composite ANCA for Schedule I(a), providing the compliance check based on the rolling 12 26 • EUB Decision 2004-027 (May 4, 2004)


month method as required by the credit facilities. The revised financial risk compliance test results based on a rolling 12 month period are presented in the following table, along with the original compliance check as presented by ANCA based on the individual 3-month period: Table 2. Revised Financial Risk Test Results – Recast Schedule I(a) Illustrative Financial Covenant Compliance Test for the Composite ANCA (ANCA DISCO including Deferral Accounts) Assuming 85%/15% Debt/Equity for PPDA

Four Months

Ended Dec. 2000

Quarter Ended Mar.

2001

Quarter Ended June

2001

Quarter Ended Sept. 2001

Quarter Ended Dec.

2001

Quarter Ended Mar.

2002

Quarter Ended June

2002 Reported EBITDA to Interest Coverage Ratios based on 3 Month Actual Check (as reported by Aquila)

3.8 4.3 4.2 4.5 4.5 4.5 3.6

Revised EBITDA to Interest Coverage Ratios based on Rolling 12 Month Check (as per Credit Facility Compliance)

3.8 4.0 4.1 4.1 4.3 4.4 4.3

Minimum Required Interest Coverage Ratios

3.75 3.75 3.25 3.25 3.25 3.25 3.75

Reviewing the EBITDA to Interest coverage ratios based on the rolling 12 month check in the Recast Schedule I(a), the Board notes that the interest coverage ratios for Composite ANCA are above the minimum required coverage ratios required under ANCA’s credit facilities for all of the periods under review. As a result, the Board concludes that, based on the deemed 85%/15% debt/equity ratio for the Deferral Accounts, Composite ANCA was able to realize interest coverage ratios above the minimum required ratios during the period 2000-2002. Furthermore, the Board notes that following the refinancing period in June 2001, the interest coverage ratios for the Composite DISCO were significantly above the minimum required ratios up until the point in time of Securitization. To the extent that there was any stretch of the balance sheet of Composite ANCA, the stretch did not cause financial harm by way of significant reductions to interest coverage ratios or violations of related covenants for Composite DISCO operations. For the above reasons, the Board concludes that, after having eliminated the impact of the “no-harm” test and subsequently reviewing ANCA on a Composite DISCO basis (as opposed to on an integrated basis), the Board’s original decision to deem a capital structure of 15% common equity and 85% debt for the ANCA Deferral Accounts still represents a fair and prudent determination. Accordingly, the Board considers that it does not need to vary ANCA’s carrying costs as determined in Decision 2001-92, following the elimination of the “no-harm” test. Consequently, the Board does not accept ANCA’s applied for carrying cost adjustment amounting to $13.9 million.

EUB Decision 2004-027 (May 4, 2004) • 27


5.4 Decision 2001-93

5.4.1 Carrying Cost Benefit of Deferred Income Taxes42


ANCA

In BR.Aquila-8, ANCA submitted that there were two adjustments to tax related matters that ANCA considers would be necessary to remove the impacts of the “no-harm” test. ANCA stated that the first adjustment that would need to be made was in respect to the carrying cost benefit of deferred income taxes. ANCA provided a calculation in Schedule J of its Response to Board IR No. 2, similar to that provided in Schedule 3 of ANCA’s Refiling #4, dated May 13, 2002, which was filed in the PPDA proceeding. Using a WACC based on 60%/40% debt/equity ratio, ANCA calculated the carrying cost benefit to be $5,554,000, in comparison to the original estimate of $4,532,000 for 2000-2002 inclusive, per Schedule 3 in Refiling #4. As a result, ANCA submitted that the first adjustment in respect of taxes that ANCA considered necessary to remove the impacts of applying the “no-harm” test would be to make a positive adjustment of $1,022,000 ($5,554,000-$4,532,000) to the income tax benefit. In Decision 2001-93, the Board established that as a result of the application of the “no-harm” test, ANCA’s treatment of income taxes and the impact to customers thereof should be assumed to be the same as that which would have been appropriate for TransAlta as an integrated utility. ANCA noted that the Board also decided that, despite the fact that for the year 2000, TransAlta did not use its portion of the PPDA as a deduction for income tax purposes, it should be assumed that an integrated utility would have used the entire PPDA as a deduction, as this would have represented a reasonable management decision. Based on this definition of the “no-harm” test, the Board instructed ANCA to refile its PPDA carrying cost and tax benefit calculations on the assumption that the full amount of the PPDA (including TransAlta’s portion) would apply as a deduction for income tax purposes. Accordingly, in ANCA’s refilings (the most recent one being Refiling #4, May 13, 2002), ANCA provided the income tax benefit adjustment to the otherwise established carrying costs in accordance with Decision 2001-93. ANCA noted that this adjustment was incorporated into the approved carrying costs forming part of the PPDA rider revenue as it currently stands, as approved in Decision 2002-054. ANCA submitted that the removal of the “no-harm” test as defined by the Board in Decision 2001-93, did not impact the basic methodology used to determine the income tax benefit as provided in the refiling and inherent in the rider approved by the Board. ANCA’s position remained that the income tax benefit should be passed to consumers, since the payment of ANCA’s 2000 and 2001 income taxes, as a stand-alone distribution utility, was in fact deferred. As a result, ANCA stated that the only adjustment required to remove the impact of the “no-harm” test would be to incorporate the adjusted WACC in order to calculate the adjusted carrying cost benefit arising from the deferred income tax payment. ANCA specifically proposed that the 60%/40% debt/equity ratio should be used in the calculation of the benefit in order to effectively remove the “no-harm” test from the carrying costs determination.

28 • EUB Decision 2004-027 (May 4, 2004)

42 Originally entitled UNCA DISCO Income Tax Benefits, Section 20.4.3 in Decision 2001-93


FIRM

FIRM noted that in response to BR.Aquila-8, ANCA requested adjustment to the carrying cost benefit of deferred income taxes. This adjustment was based on using ANCA’s WACC approved in Decision 2001-92 but revising the debt/equity ratio from 85%/15% to 60%/40%, as shown in Schedule J attached to ANCA Response to Board IR No. 2. ANCA’s adjustment would result in an increased credit of $1,022,000 in the income tax benefit. FIRM submitted that there was no requirement to adjust the approved capital structure ordered by the Board, as discussed in its comments regarding carrying costs, capital structure and the financial risk test. Similarly, FIRM argued that there should be no adjustment to the carrying cost benefit for the ANCA requested adjustment to capital structure. FIRM submitted that the Board approved capital structure in Decisions 2001-92 and 2001-93 has resulted in no harm to ANCA and meets the “no-harm” test for consumers. As a result, FIRM submitted that no adjustment or variation was justified in regard to the carrying cost benefit of deferred income taxes. 5.4.1.2 Views of the Board

In Decision 2001-93, the Board stated that:

Consistent with the Board’s method of determining carrying costs on an integrated basis, the Board considers that the carrying cost benefits of income tax deferrals of AE and UNCA should be viewed on an integrated basis. The Board considers this approach is consistent with the method used in Decision 2001-92 to determine the approved after-tax WACC for AE DISCO and UNCA.43

Based on this objective of applying the “no-harm” test to the carrying cost benefits of income tax deferrals, the Board considered TransAlta DISCO’s portion of the Deferral Accounts. The Board noted that TransAlta DISCO incurred pool price deferral account costs over the period January 1, 2000 to August 31, 2000 up until the acquisition of TransAlta’s distribution business by ANCA on September 1, 2000. Following a statement indicating that TransAlta did not make any claim for the 2000 deferral account expenses in their 2000 tax filing, the Board then stated:

For this reason, the Board considers that the entire amount of the TransAlta DISCO portion of the 2000 deferral account costs, representing a significant part of the final 2000 deferral account balances of UNCA, could be considered as a deduction to UNCA for income tax purposes in the year 2000 and in subsequent years, viewing UNCA on an integrated basis.44

As a result, the Board directed ANCA, in its refiling, to determine the benefits that would have arisen from claiming the full amount of the Deferral Account costs, including the TransAlta portion, in the year 2000.45 Related to this approach, the Board notes ANCA’s arguments regarding the application of the “no-harm” test in Decision 2001-93. In its Submission dated April 7, 2003, ANCA submitted the following arguments and concerns regarding income taxes and the “no-harm” test at page 11: 43 Section 20.4.2.2, page 81 44 Section 20.4.2.3, page 82 45 Section 20.4.3, page 86

EUB Decision 2004-027 (May 4, 2004) • 29


56. The application of the “no-harm” test is critical to the manner in which the Board

decided to allocate or attribute the benefits and risks of deferring income tax to reduce carrying costs.46

… 58. The Board’s Decision, applying the integrated approach and the “no-harm” test

to the Income Tax matters, raises difficult issues, which demonstrate the problems inherent in trying to reassemble a hypothetical utility after divestiture. The Board’s Decision is based on the resurrection of a no longer existing integrated entity or the passing of tax credits between unrelated corporations. However, the tax department only recognizes legal entities, not regulatory fictions. No matter how desirable it may be from a ratepayers point of view to reassemble a now departed integrated entity, in the real world of income tax it is not possible.

59. For example, the Board’s request to ANCA47 to refile its 2000 Tax return to

include the deduction of expenses incurred by TransAlta, a company with which it is not affiliated, is without basis in Income Tax law or practice.

Given the Board’s determination in Decision 2001-93 that ANCA’s carrying cost benefits of income tax deferrals should be viewed on an integrated basis and the Board’s direction that ANCA should include the TransAlta portion of the Deferral Accounts in its determination of the benefits, the Board agrees with ANCA’s argument above that it is necessary to review and vary this specific determination in order to remove the impact of the “no-harm” test. However, based on the Board’s prior finding above that the deemed capital structure of 15% common equity and 85% debt for ANCA’s Deferral Accounts still represents a fair and prudent determination after having eliminated the impact of the “no-harm” test, the Board does not consider that any variance should include an adjustment to reflect a change in the capital structure, as requested by ANCA (i.e., the applied for 60%/40% debt to equity ratio). The Board has revised Schedule 3 of ANCA’s Refiling #4, dated May 13, 2002 (filed in the PPDA proceeding), in order to calculate the adjustment required to remove the impact of the “no-harm” test on the estimated carrying cost benefit of deferred income taxes (shown in Appendix 2 of this Decision). In order to eliminate “no-harm”, the TransAlta portion of the Deferral Accounts, or the PPDAs incurred by TransAlta, should not be taken into account in the calculation. To the extent that TransAlta DISCO incurred PPDA costs over the period January 1, 2000 to August 31, 2000 up until the acquisition of TransAlta’s distribution business by ANCA on September 1, 2000, this period needs to be eliminated from the income tax carrying cost benefit calculation in Revised Schedule 3, i.e., the calculation of benefits commence in September 2000, consistent with Schedules 7.1 and 7.2 in ANCA’s original PPDA application.48 As a result of the removal of TransAlta’s portion of the Deferral Accounts, ANCA’s total income tax carrying cost benefit is estimated to be $2,550,000 for 2001-2002, representing a reduction of $1,982,000 from the original estimate of $4,532,000 from Schedule 3 in ANCA’s Refiling #4. As a result, the total adjustment to the income tax deferral benefit amounts to a reduction of 46 EUB Decision 2001-93, p. 80 to 88. 47 EUB Decision 2001-93, p. 84.

30 • EUB Decision 2004-027 (May 4, 2004)

48 Exhibit 338, March 30, 2001.


$1,982,000. Breaking out the total for the two-year period, the following table sets out the 2001 and 2002 income tax deferral benefits and the related adjustments to remove the impact of the “no-harm” test on the estimated carrying cost benefit of deferred income taxes: Table 3. Adjustment for Removal of the “No-Harm” Test on Carrying Cost Benefit of Deferred Income Taxes

Schedule 3 in ANCA’s Refiling #4

($ 000)

Board Revised Schedule 3

($ 000)

Board Approved Adjustment to Income Tax

Deferral Benefit ($ 000)

2001 3,106 1,613 (1,493) 2002 1,426 937 (489) Total 4,532 2,550 (1,982)

Accordingly, the Board directs ANCA to recover the total adjustment to the income tax deferral benefit of $1,982,000 at the time of the PPDA true-up process in 2004. The Board directs ANCA to collect the 2001 carrying cost adjustment of $1,493,000 from the Balancing Pool, reflecting the reduction in the 2001 carrying cost benefit of deferred income taxes. The Board further directs ANCA to recover the 2002 carrying cost adjustment of $489,000 from customers, reflecting the reduction in the 2002 carrying cost benefit of deferred income taxes, and in accordance with the ANCA Terms Sheet approved in Decision 2002-054 (Schedule F, the UNCA DISCO Terms Sheet for the Deferral Accounts rider, which identifies and summarizes total PPDA collectible amounts by rate class and other terms and conditions for the rider). 5.4.2 Large Corporations Tax


ANCA ANCA submitted that the second tax related adjustment required to remove the impact of the “no-harm” test was in respect of the Large Corporations Tax (LCT). ANCA further submitted that as a stand-alone distribution utility, it paid LCT on the debt and equity financing of the PPDA balance. Based on year-end PPDA balances and a rate of 0.225%, ANCA estimated LCT as follows: 2000 LCT ($385,433,000 x 0.225%) $ 867,0002001 LCT ($345,342,000 x 0.225%) $ 777,000Total incremental LCT $1,644,000

ANCA noted that LCT can generally be reduced by the amount of federal surtax paid. However, ANCA submitted that in 2000 and 2001, ANCA was in a loss position due to the PPDA deduction, and therefore no federal surtax was paid in those years, contrary to the Board’s assumption in Decision 2001-93.49 As a result, the total LCT in 2000 and 2001 of $1,644,000 was not reduced. ANCA further noted that in 2002, ANCA received the PPDA securitization proceeds and therefore had taxable income of $33 million (per ANCA 2002 Report on Finances and Operations) plus the PPDA securitization proceeds. ANCA stated that federal surtax was paid on

49 Page 71

EUB Decision 2004-027 (May 4, 2004) • 31


this income at a rate of 1.12% in 2002. Thus, in this year, the incremental 2002 federal surtax could offset LCT otherwise payable. As such, ANCA submitted there was no incremental LCT for 2002 as a result of the PPDA and no adjustment for 2002 was necessary. ANCA submitted that since the Board’s Decisions in respect of the PPDA to date have not allowed for recovery of the incremental 2000 and 2001 LCT arising directly from the PPDA as part of the currently approved rider, ANCA should be allowed to collect an additional $1,644,000 relative to the currently approved rider. ANCA noted that while this incremental LCT would also reduce the additional income tax benefit that it had requested, it made the simplifying assumption that this effect would be relatively small and has therefore not included it. In its response to Board IR No. 3, ANCA submitted Schedule BR.Aquila-9, Reconciliation of 2000 and 2001 Income Taxes, (shown in Appendix 3 of this Decision), which presented an analysis of income taxes for ANCA as a legal entity. The reconciliation included income taxes for Consolidated DISCO operations,50 defined as the consolidation of DISCO operations and the ANCA PPDA and the PPDA belonging to TransAlta. 5.4.2.2 Views of the Board The Board notes ANCA’s submission that an aggregate LCT of $1,644,000 was attributable to the PPDA balances for the years 2000 and 2001. The Board further notes ANCA’s submission that as a result of the PPDAs, no income tax related to regulatory operations was payable in 2000 and 2001 and therefore a federal surtax credit was not available to reduce the LCT otherwise payable. However, the Board notes that in Schedule BR.Aquila-9, the aggregate LCT in the amount of $1,644,000 also included the LCT calculated on TransAlta’s PPDAs. The Board considers that it should only allow the LCT related to ANCA’s PPDA capital, as indicated in the “ANCA DISCO and PPDA” and “ANCA Total” columns set out in Schedule BR.Aquila-9, since these amounts would be subject to LCT that would otherwise be payable by ANCA. Thus, the taxable capital for purposes of determining LCT in respect of ANCA’s Deferral Accounts is estimated to be $246,341,000 in 2000 (calculated as $385,433,000 for the total PPDA less $139,092,000 for TransAlta’s portion of the PPDA) and $184,148,000 in 2001 (calculated as $345,342,000 for the total PPDA less $161,194,000 for TransAlta’s portion of the PPDA). Based on the adjusted year-end ANCA PPDA balances and a rate of 0.225%, the Board estimates the adjusted LCT to be as follows: 2000 LCT ($246,341,000 x 0.225%) $554,000 2001 LCT ($184,148,000 x 0.225%) $415,000 Total incremental LCT $969,000

Accordingly, the Board approves ANCA’s recovery of $969,000 in respect of 2000 and 2001 LCT and considers that the LCT collection should be dealt with at the time of the PPDA true-up process in 2004. As a result, the Board directs ANCA to recover the LCT adjustment of $969,000 from customers at the time of the PPDA true-up process in 2004, in accordance with

32 • EUB Decision 2004-027 (May 4, 2004)

50 Defined as Composite ANCA or Composite DISCO earlier in the Decision.


the ANCA Terms Sheet approved in Decision 2002-054 (Schedule F, the UNCA DISCO Terms Sheet for the Deferral Accounts rider, which identifies and summarizes total PPDA collectible amounts by rate class and other terms and conditions for the rider). 6 SUMMARY OF BOARD APPROVED ANCA PPDA COST ADJUSTMENTS

The following table summarizes the Board approved adjustments arising from the variance of Decisions 2001-92 and 2001-93: Table 4. Board Approved ANCA PPDA Cost Adjustments – Decisions 2001-92 and 2001-93

ANCA Submitted PPDA Cost

Adjustments ($ 000)

Board Approved PPDA Cost Adjustments

($ 000) Difference

($ 000) Decision 2001-92 Adjustment to 2001 Carrying Costs 8,817 0 (8,817) Adjustment to 2002 Carrying Costs 5,155 0 (5,155) Total Adjustment for Decision 2001-92 13,973 0 (13,973) Decision 2001-93 Adjustment to Carrying Cost Benefit of Deferred Income Taxes for 2001-2002

(1,022) 1,982 3,004

Adjustment to Large Corporations Tax for 2000-2001 1,644 969 (675) Total Adjustment for Decision 2001-93 622 2,951 2,329 Total Adjustment for Decisions 2001-92 & 2001-93 14,595 2,951 (11,644) Total to be Recovered from /(paid to) Customers 6,434 1,458 (4,976) Total to be Recovered from /(paid to) the Balancing Pool 8,161 1,493 (6,668)

7 SUMMARY OF BOARD DIRECTIONS

This section is provided for the convenience of readers. In the event of any difference between the Directions in this section and those in the main body of the report, the wording in the main body of the Decision shall prevail.

1. Accordingly, the Board directs ANCA to recover the total adjustment to the income tax deferral benefit of $1,982,000 at the time of the PPDA true-up process in 2004. The Board directs ANCA to collect the 2001 carrying cost adjustment of $1,493,000 from the Balancing Pool, reflecting the reduction in the 2001 carrying cost benefit of deferred income taxes. The Board further directs ANCA to recover the 2002 carrying cost adjustment of $489,000 from customers, reflecting the reduction in the 2002 carrying cost benefit of deferred income taxes, and in accordance with the ANCA Terms Sheet approved in Decision 2002-054 (Schedule F, the UNCA DISCO Terms Sheet for the Deferral Accounts rider, which identifies and summarizes total PPDA collectible amounts by rate class and other terms and conditions for the rider). ......................................................................................................... 31

2. Accordingly, the Board approves ANCA’s recovery of $969,000 in respect of 2000 and 2001 LCT and considers that the LCT collection should be dealt with at the time of the PPDA true-up process in 2004. As a result, the Board directs ANCA to recover the LCT adjustment of $969,000 from customers at the time of the PPDA true-up process in 2004, in accordance

EUB Decision 2004-027 (May 4, 2004) • 33


with the ANCA Terms Sheet approved in Decision 2002-054 (Schedule F, the UNCA DISCO Terms Sheet for the Deferral Accounts rider, which identifies and summarizes total PPDA collectible amounts by rate class and other terms and conditions for the rider).......... 32

8 ORDER

IT IS HEREBY ORDERED THAT: (1) ANCA request a one-time payment from the Balancing Pool at the time of the PPDA

true-up process in 2004 in the amount of $1,493,000, reflecting the approved reduction in the 2001 carrying cost benefit of deferred income taxes.

(2) Upon receipt of a request from ANCA pursuant to paragraph 1 of this Order, the Balancing Pool shall disburse to ANCA the requested amount of $1,493,000.

(3) ANCA shall recover $489,000 from customers at the time of the PPDA true-up process in 2004, reflecting the approved reduction in the 2002 carrying cost benefit of deferred income taxes and pursuant to the ANCA Terms Sheet approved in Decision 2002-054.

(4) ANCA shall recover $969,000 from customers at the time of the PPDA true-up process in 2004, reflecting the approved total incremental LCT and pursuant to the ANCA Terms Sheet approved in Decision 2002-054.

Dated in Calgary, Alberta on May 4, 2004. ALBERTA ENERGY AND UTILITIES BOARD (original signed by) J. I. Douglas, FCA Presiding Member (original signed by) B. T. McManus, Q.C. Member (original signed by) M. J. Bruni, Q.C. Acting Member

34 • EUB Decision 2004-027 (May 4, 2004)


APPENDIX 1 – FINANCIAL COVENANT COMPLIANCE TESTS FOR ANCA DISCO AND PPDA APPLYING VARYING CAPITAL STRUCTURES FOR THE PPDA AS REPORTED IN BR.AQUILA-1 (SCHEDULES I(A) – (F))

"BR.Aquila-1 Schedules I(a)-(f) Fin

(Consists of 6 pages)

EUB Decision 2004-27 (May 4, 2004) • 35


APPENDIX 2 – ADJUSTMENT FOR REMOVAL OF THE “NO-HARM” TEST ON CARRYING COST BENEFIT OF DEFERRED INCOME TAXES

"ANCA Refiling #4 - Revised Schedule 3.x

(Consists of 1 page)

EUB Decision 2004-27 (May 4, 2004) • 37


APPENDIX 3 – RECONCILIATION OF 2000 AND 2001 INCOME TAXES AS REPORTED IN BR.AQUILA-9 (SCHEDULE BR.AQUILA-9)

"Schedule BR.Aquila-9.xls"

(Consists of 1 page)

EUB Decision 2004-27 (May 4, 2004) • 39

Review and Variance ofEUB Decisions 2001-092 and 2001-093

Aquila Networks Canada (Alberta) Ltd.Appendix 1Page 1 of 6

Aquila Networks Canada (Alberta) Limited BR.Aquila-1PPDA Review and Variance Application December 1, 2003Illustrative Financial Covenant Tests for Disco and PPDA Schedule I(a)85/15 Debt/Equity ('000's)

4 Months Quarter Quarter Quarter Quarter Quarter Quarter Ended Ended Ended Ended Ended Ended Ended

December March June September December March June2000 2001 2001 2001 2001 2002 2002

PPDA Deferral Account Balance 385,433 377,341 376,834 345,342 345,342 296,932 254,606

ANCA DISCO

Debt 5,800 4,375 4,375 4,375 4,375 4,850 4,850Preferred 0 0 0 0 0 0 0Equity 4,140 6,929 5,593 1,974 (1,789) 5,894 (1,212)Income tax 6,300 5,325 5,325 5,325 5,324 3,450 3,450Return plus tax 16,240 16,629 15,293 11,674 7,910 14,194 7,088Before tax interest coverage 2.8 3.8 3.5 2.7 1.8 2.9 1.5Depreciation expense 25,637 19,537 19,783 19,993 20,248 13,357 13,786EBITDA 41,877 36,166 35,076 31,667 28,158 27,551 20,874EBITDA to Interest Covenant Ratio 7.2 8.3 8.0 7.2 6.4 5.7 4.3

DISCO Deferral Account (ANCA and TAU)

Debt 8,215 6,078 6,010 4,005 3,023 2,040 1,869Preferred 0 0 0 0 0 0 0Equity 1,831 1,344 1,342 1,230 1,230 1,002 859Income tax 1,475 978 977 895 895 647 555Return plus tax 11,521 8,400 8,329 6,130 5,148 3,689 3,283Before tax interest coverage 1.4 1.4 1.4 1.5 1.7 1.8 1.8Depreciation expense 0 0 0 0 0 0 0EBITDA 11,521 8,400 8,329 6,130 5,148 3,689 3,283EBITDA to Interest Covenant Ratio 1.4 1.4 1.4 1.5 1.7 1.8 1.8

Composite DISCO with Deferral Account

Debt 14,015 10,453 10,385 8,380 7,398 6,890 6,719Preferred 0 0 0 0 0 0 0Equity 5,971 8,273 6,935 3,204 (559) 6,896 (353)Income tax 7,775 6,303 6,302 6,220 6,219 4,097 4,005Return plus tax 27,761 25,029 23,622 17,804 13,058 17,883 10,371Before tax interest coverage 2.0 2.4 2.3 2.1 1.8 2.6 1.5Depreciation expense 25,637 19,537 19,783 19,993 20,248 13,357 13,786EBITDA 53,398 44,566 43,405 37,797 33,306 31,240 24,157EBITDA to Interest Covenant Ratio 3.8 4.3 4.2 4.5 4.5 4.5 3.6

Notes:1. ANCA Disco reconciles to Report on Finances and Operations.2. Interest is calculated based on debt portion of mid-quarter PPDA balance times effective interest rate.3. Return on equity is calculated based on ratio of return on equity times PPDA balance for the quarter. Return on equity assumed to be 9.5% from Dec 2000 to Dec 2001 and 9% from January to June 2002.

EUB Decision 2004-027 (May 4, 2004)



Aquila Networks Canada (Alberta) Limited BR.Aquila-1PPDA Review and Variance Application December 1, 2003Illustrative Financial Covenant Tests for Disco and PPDA Schedule I(b)80/20 Debt/Equity ('000's)




ANCA DISCO



Debt 7,730 5,721 5,656 3,770 2,846 1,920 1,759Preferred 0 0 0 0 0 0 0Equity 2,441 1,792 1,790 1,640 1,640 1,336 1,146Income tax 1,967 1,304 1,302 1,193 1,193 863 740Return plus tax 12,138 8,817 8,748 6,603 5,679 4,119 3,645Before tax interest coverage 1.6 1.5 1.5 1.8 2.0 2.1 2.1Depreciation expense 0 0 0 0 0 0 0EBITDA 12,138 8,817 8,748 6,603 5,679 4,119 3,645EBITDA to Interest Covenant Ratio 1.6 1.5 1.5 1.8 2.0 2.1 2.1


Debt 13,530 10,096 10,031 8,145 7,221 6,770 6,609Preferred 0 0 0 0 0 0 0Equity 6,581 8,721 7,383 3,614 (149) 7,230 (66)Income tax 8,267 6,629 6,627 6,518 6,517 4,313 4,190Return plus tax 28,378 25,446 24,041 18,277 13,589 18,313 10,733Before tax interest coverage 2.1 2.5 2.4 2.2 1.9 2.7 1.6Depreciation expense 25,637 19,537 19,783 19,993 20,248 13,357 13,786EBITDA 54,015 44,983 43,824 38,270 33,837 31,670 24,519EBITDA to Interest Covenant Ratio 4.0 4.5 4.4 4.7 4.7 4.7 3.7





Aquila Networks Canada (Alberta) Limited BR.Aquila-1PPDA Review and Variance Application December 1, 2003Illustrative Financial Covenant Tests for Disco and PPDA Schedule I(c)75/25 Debt/Equity ('000's)




ANCA DISCO



Debt 7,247 5,363 5,303 3,534 2,668 1,800 1,649Preferred 0 0 0 0 0 0 0Equity 3,051 2,240 2,237 2,050 2,050 1,670 1,432Income tax 2,458 1,630 1,628 1,492 1,492 1,079 925Return plus tax 12,756 9,233 9,168 7,076 6,210 4,549 4,006Before tax interest coverage 1.8 1.7 1.7 2.0 2.3 2.5 2.4Depreciation expense 0 0 0 0 0 0 0EBITDA 12,756 9,233 9,168 7,076 6,210 4,549 4,006EBITDA to Interest Covenant Ratio 1.8 1.7 1.7 2.0 2.3 2.5 2.4


Debt 13,047 9,738 9,678 7,909 7,043 6,650 6,499Preferred 0 0 0 0 0 0 0Equity 7,191 9,169 7,830 4,024 261 7,564 220Income tax 8,758 6,955 6,953 6,817 6,816 4,529 4,375Return plus tax 28,996 25,862 24,461 18,750 14,120 18,743 11,094Before tax interest coverage 2.2 2.7 2.5 2.4 2.0 2.8 1.7Depreciation expense 25,637 19,537 19,783 19,993 20,248 13,357 13,786EBITDA 54,633 45,399 44,244 38,743 34,368 32,100 24,880EBITDA to Interest Covenant Ratio 4.2 4.7 4.6 4.9 4.9 4.8 3.8



Review and Variance of EUB Decisions 2001-92 and 2001-93


Aquila Networks Canada (Alberta) Limited BR.Aquila-1PPDA Review and Variance Application December 1, 2003Illustrative Financial Covenant Tests for Disco and PPDA Schedule I(d)70/30 Debt/Equity ('000's)




ANCA DISCO



Debt 6,764 5,006 4,949 3,299 2,490 1,680 1,539Preferred 0 0 0 0 0 0 0Equity 3,662 2,689 2,685 2,461 2,461 2,004 1,719Income tax 2,950 1,956 1,953 1,790 1,790 1,294 1,110Return plus tax 13,376 9,651 9,587 7,550 6,741 4,978 4,368Before tax interest coverage 2.0 1.9 1.9 2.3 2.7 3.0 2.8Depreciation expense 0 0 0 0 0 0 0EBITDA 13,376 9,651 9,587 7,550 6,741 4,978 4,368EBITDA to Interest Covenant Ratio 2.0 1.9 1.9 2.3 2.7 3.0 2.8


Debt 12,564 9,381 9,324 7,674 6,865 6,530 6,389Preferred 0 0 0 0 0 0 0Equity 7,802 9,618 8,278 4,435 672 7,898 507Income tax 9,250 7,281 7,278 7,115 7,114 4,744 4,560Return plus tax 29,616 26,280 24,880 19,224 14,651 19,172 11,456Before tax interest coverage 2.4 2.8 2.7 2.5 2.1 2.9 1.8Depreciation expense 25,637 19,537 19,783 19,993 20,248 13,357 13,786EBITDA 55,253 45,817 44,663 39,217 34,899 32,529 25,242EBITDA to Interest Covenant Ratio 4.4 4.9 4.8 5.1 5.1 5.0 4.0





Aquila Networks Canada (Alberta) Limited BR.Aquila-1PPDA Review and Variance Application December 1, 2003Illustrative Financial Covenant Tests for Disco and PPDA Schedule I(e)65/35 Debt/Equity ('000's)




ANCA DISCO





Debt 12,080 9,023 8,971 7,438 6,687 6,410 6,280Preferred 0 0 0 0 0 0 0Equity 8,412 10,066 8,725 4,845 1,082 8,232 793Income tax 9,742 7,607 7,604 7,413 7,412 4,960 4,745Return plus tax 30,234 26,696 25,300 19,696 15,181 19,602 11,818Before tax interest coverage 2.5 3.0 2.8 2.6 2.3 3.1 1.9Depreciation expense 25,637 19,537 19,783 19,993 20,248 13,357 13,786EBITDA 55,871 46,233 45,083 39,689 35,429 32,959 25,604EBITDA to Interest Covenant Ratio 4.6 5.1 5.0 5.3 5.3 5.1 4.1





Aquila Networks Canada (Alberta) Limited BR.Aquila-1PPDA Review and Variance Application December 1, 2003Illustrative Financial Covenant Tests for Disco and PPDA Schedule I(f)60/40 Debt/Equity ('000's)




ANCA DISCO





Debt 11,597 8,666 8,617 7,202 6,509 6,290 6,170Preferred 0 0 0 0 0 0 0Equity 9,022 10,514 9,173 5,255 1,492 8,566 1,079Income tax 10,234 7,933 7,929 7,711 7,710 5,176 4,930Return plus tax 30,853 27,113 25,719 20,168 15,711 20,032 12,179Before tax interest coverage 2.7 3.1 3.0 2.8 2.4 3.2 2.0Depreciation expense 25,637 19,537 19,783 19,993 20,248 13,357 13,786EBITDA 56,490 46,650 45,502 40,161 35,959 33,389 25,965EBITDA to Interest Covenant Ratio 4.9 5.4 5.3 5.6 5.5 5.3 4.2



Review and Variance of EUB Decisions 2001-92 and 2001-93


Revised Schedule PPDA-3Aquila Networks Canada (Alberta) Ltd. ANCA PPDA Refiling No. 42000 Pool Price Deferral Account Review and Variance 04-May-04

Adjustment for Removal of The "No-Harm" Test on Carrying Cost Benefit of Deferred Income Taxes

A B C D E F G H I J K L M N O

2000 2001 2002 $28,512,655 Tax Collected

But Not Paid (Note 1) $21,729,425 Tax Collected

But Not Paid (Note 2) $50,242,079 Tax Previously Collected

Is Paid (Note 3)

Month

Interest Rates Changes Balance

Interest Rates

(Note 4) Changes Balance

After Tax Carrying

Cost Benefit

Tax Component of Benefit

Total Carrying

Cost Benefit

Interest Rates

(Note 4) Changes Balance

After Tax Carrying

Cost Benefit

Tax Component of Benefit

Total Carrying

Cost BenefitJan 6.50% - - 6.91% 1,811 11,315 61.1 8.8 69.8 5.60% (2,603) 28,631 142.4 21.6 164.0 Feb 6.73% - - 6.91% 1,811 13,126 64.8 9.3 74.1 5.60% (2,603) 26,028 117.4 17.8 135.2 Mar 6.83% - - 6.91% 1,811 14,937 82.3 11.8 94.1 5.60% (2,603) 23,425 117.6 17.9 135.5 Apr 7.00% - - 6.91% 1,811 16,747 90.0 12.9 102.9 5.60% (2,603) 20,822 101.8 15.5 117.3 May 7.24% - - 6.91% 1,811 18,558 103.6 14.8 118.4 5.60% (2,603) 18,219 92.8 14.1 106.9 Jun 7.50% - - 6.91% 1,811 20,369 110.5 15.8 126.4 5.60% (2,603) 15,617 77.9 11.8 89.7 Jul 7.50% - - 6.91% 1,811 22,180 124.9 17.9 142.7 5.60% (2,603) 13,014 68.1 10.3 78.4 Aug 7.50% - - 6.91% 1,811 23,991 135.5 19.4 154.9 4.52% (2,603) 10,411 44.9 4.1 49.0 Sep 7.50% 2,376 2,376 6.91% 1,811 25,801 141.4 20.3 161.7 3.50% (2,603) 7,808 26.2 - 26.2 Oct 7.50% 2,376 4,752 6.91% 1,811 27,612 156.7 22.5 179.2 3.50% (2,603) 5,205 19.3 - 19.3 Nov 7.50% 2,376 7,128 6.91% 1,811 29,423 162.0 23.2 185.2 3.50% (2,603) 2,603 11.2 - 11.2 Dec 7.50% 2,376 9,504 6.91% 1,811 31,234 178.0 25.5 203.5 3.50% (2,603) (0) 3.9 - 3.9

1,410.7 202.1 1,612.9 823.6 113.1 936.6 Total Income Tax Carrying Cost Benefits 2001 - 2002 (commencing January 1, 2001): 2,549.5 Total Income Tax Carrying Cost Benefits 2001 - 2002 from Schedule 3 of Refiling #4 (in currently approved PPDA Rider): 4,532.0 Adjustment for Removal of "No-Harm" Test (1,982.5)

Note 1: $28.7 million in 2000 Income Taxes from TransAlta’s Schedule D-1 of its 1999-2000 Phase I refiling as revised January 12, 2000, multiplied by 99.35% (the ratio of the $331.351 million PPDA balance to the total $333.529 million PPDA and OMA balance on January 1, 2002).

Note 2: $23.8 million in 2001 Income Taxes from Schedule 1 of the Cost of Service Schedules as refiled February 12, 2001, prorated downwards to 91.9% to account for the lower revenuerequirement from the Negotiated Settlement and multiplied by 99.35% (the ratio of the $331.351 million PPDAA balance to the total $333.529 million PPDA and OMA balance on January 1,2002).

Note 3: Securitization Deal in mid-August 2002 results in the balance of the 2000 PPDA becoming income in 2002.Note 4: Interest rate used in 2001 and January to mid-August 2002 is after tax, calculated as: (Approved Debt Rate x Approved Debt Ratio) + (Approved Equity Rate x Approved Equity Ratio)

($000)




AQUILA NETWORKS CANADA (ALBERTA) LTD.RECONCILIATION OF 2000 AND 2001 INCOME TAXES Schedule BR.Aquila-9( in $000's) March 12, 2004

2000 2001Consolidated ANCA Consolidated ANCA

Report on Disco and TAU TAU Disco & Non-Reg & ANCA Report on Disco and TAU Disco & Non-Reg & ANCAFinance PPDA PPDA Disco PPDA PPDA Other Total Finance PPDA PPDA PPDA PPDA Other Total

(a) (b) ( c ) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) = (a) + (b) = ( c ) - (d) - (e) = (f) + (g) = (i) + (j) = (k) - (l) = (m) + (n)

1 Net income 28,400 28,400 24,900 3,500 3,500 12,600 12,600 12,600 12,6002 Tax provision 36,600 36,600 30,300 6,300 6,300 21,300 21,300 21,300 21,3003 Net income before tax 65,000 0 65,000 55,200 0 9,800 9,800 33,900 0 33,900 0 33,900 33,900

4 Amortization 79,100 79,100 53,500 25,600 25,600 79,600 79,600 79,600 79,6005 Deductible costs included in property (4,500) (4,500) (3,000) (1,500) (1,500) (5,400) (5,400) (5,400) (5,400)6 Deductible interest costs included in property (600) (600) (200) (400) (400) (300) (300) (300) (300)7 CCA (48,100) (48,100) (32,100) (16,000) (16,000) (51,000) (51,000) (51,000) (51,000)8 Pension expense 1,700 1,700 700 1,000 1,000 0 0 0 09 Non-deductible meals and entertainment 400 400 300 100 100 500 500 500 500

10 Other timing differences (300) (300) 700 (1,000) (1,000) 100 100 100 10011 Capitalized deferral account costs 0 (385,433) (385,433) 0 (139,092) (246,341) (246,341) 0 40,091 40,091 (22,102) 62,193 62,19312 Timing and permanent differences 27,700 (385,433) (357,733) 19,900 (139,092) (238,541) (238,541) 23,500 40,091 63,591 (22,102) 85,693 85,693

13 Net income (loss) for income tax purposes 92,700 (385,433) (292,733) 75,100 (139,092) (228,741) (228,741) 57,400 40,091 97,491 (22,102) 119,593 119,59314 Non-capital losses of preceding tax years 0 0 0 0 0 0 0 0 (97,491) (97,491) 0 (119,593) (119,593)15 Taxable income (loss) 92,700 (385,433) (292,733) 75,100 (139,092) (228,741) 46,166 (182,575) 57,400 (57,400) 0 (22,102) 0 2,339 2,339

16 Part 1 tax payable, excluding surtax 26,000 (26,000) 0 21,000 (21,000) 0 0 0 15,500 (15,500) 0 0 0 631 63117 Corporate surtax 1,000 (1,000) 0 800 (800) 0 0 0 600 (600) 0 0 0 26 2618 Total Part 1 tax payable 27,000 (27,000) 0 21,800 (21,800) 0 0 0 16,100 (16,100) 0 0 0 657 65719 Alberta tax payable 14,400 (14,400) 0 11,600 (11,600) 0 0 0 8,000 (8,000) 0 0 0 326 32620 Part 1.3 tax payable (LCT), see below 0 1,867 1,867 0 980 887 12 899 457 1,377 1,834 363 1,471 621 2,092

21 Total tax payable 41,400 (39,533) 1,867 33,400 (32,420) 887 12 899 24,557 (22,723) 1,834 363 1,471 1,604 3,075

Part 1.3 Tax 22 Taxable capital 448,100 385,433 833,533 448,100 139,092 694,441 0 694,441 469,600 345,342 814,942 161,194 653,748 0 653,74823 Tax at 0.225% 1,000 867 1,867 1,000 313 1,562 0 1,562 1,057 777 1,834 363 1,471 0 1,47124 Prorate for ownership period 1,000 867 1,867 667 313 887 12 899 1,057 777 1,834 363 1,471 647 2,11825 Less: surtax credit applied (note) (1,000) 1,000 0 (667) 667 0 0 0 (600) 600 0 0 0 (26) (26)26 Part 1.3 tax 0 1,867 1,867 0 980 887 12 899 457 1,377 1,834 363 1,471 621 2,092

Notes:Columns (a) and (i) as per 2001 Report on Finances & Operations dated May 7, 2002. The year 2000 reflects a full year to be comparable with 2001Column (b) deferral balance as per Schedule B 2001 dated August 21, 2003.Column (d) = TAU portion of Column (a) - not included in ANCA tax returnColumn (e) = TAU portion of Column (b) - not included in ANCA tax return.Column (g) = ANCA non-reg items not relevant to this application.

Column (j) , L.12 = amount of deferral account repaid in 2001 (385,433 - 345,432 balance as per Schedule B 2002 ) taken into income in 2001Column (j) , L. 14 = amount of required non-capital loss to be utilized in 2001 to zero out taxable incomeColumn (l) = TAU portion of Column (i). - not included in ANCA tax return.Column (n) = ANCA non-reg items not relevant to this application.

PPDA columns do not include any effect of carrying costs from PPDA ridersEUB Decision 2004-027 (May 4, 2004)

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