Upper Lakes Group Inc. - AUC...ALBERTA ENERGY AND UTILITIES BOARD Decision 2005-118: Upper Lakes...

Decision 2005-118

Upper Lakes Group Inc. Sale of Shares in Thornmark Utilities Corporation and Thornmark Waste Management Corporation November 2, 2005

ALBERTA ENERGY AND UTILITIES BOARD Decision 2005-118: Upper Lakes Group Inc. Sale of Shares in Thornmark Utilities Corporation and Thornmark Waste Management Corporation Application No. 1398651 November 2, 2005 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

2 BACKGROUND ................................................................................................................... 2

3 ISSUES................................................................................................................................... 3

4 DISCUSSION OF ISSUES................................................................................................... 4 4.1 The TUC Sale................................................................................................................. 4

4.1.1 Regulatory Framework ..................................................................................... 4 4.1.2 Impact to Customers ......................................................................................... 7

4.1.2.1 Financial Impact.............................................................................. 7 4.1.2.2 Continutity of Safe and Reliable Service...................................... 13 4.1.2.3 Board’s Conclusion on the TUC Sale........................................... 15

4.1.3 Allocation of Proceeds and Need for Holdback ............................................. 16 4.2 The TWMC Sale .......................................................................................................... 18 4.3 Designation of the Owner of TUC............................................................................... 21 4.4 Other Matters ............................................................................................................... 22 4.5 Future Applications...................................................................................................... 23

5 ORDER ................................................................................................................................ 24

APPENDIX 1 – PARTIES PARTICIPATING IN THE PROCEEDING ............................. 25

APPENDIX 2 – SUMMARY OF BOARD DIRECTIONS ..................................................... 26

APPENDIX 3 – SUMMARY OF BOARD CONDITIONS..................................................... 27 List of Tables Table 1. Schedule “A” Charges: Original Contemplated versus Current ......................... 10

Table 2. Schedule “B” Charges: Original Contemplated versus Current ......................... 11

EUB Decision 2005-118 (November 2, 2005) • i

ALBERTA ENERGY AND UTILITIES BOARD Calgary Alberta UPPER LAKES GROUP INC. SALE OF SHARES IN THORNMARK UTILITIES CORPORATION AND Decision 2005-118 THORNMARK WASTE MANAGEMENT CORPORATION Application No. 1398651 1 INTRODUCTION

On April 29, 2005, Upper Lakes Group Inc. (ULGI) made an application to the Alberta Energy and Utilities Board (the EUB or Board) pursuant to section 101(2)(d)(i) of the Public Utilities Board Act (PUB Act), requesting approval for the sale of 100% of ULGI’s ownership interests in both Thornmark Utilities Corporation (TUC) and Thornmark Waste Management Corporation (TWMC), to Terasen Utility Services Inc. (TUSI) (the Application). TUC is a party to a supply and franchise agreement (the Franchise Agreement) with the Municipal District of Foothills No. 31 (MD), by virtue of which TUC provides certain water utility services within the MD. TWMC owns and operates a wastewater utility business having a parallel customer base with TUC, but is not regulated by the Board. ULGI is the sole shareholder of both TUC and TWMC. ULGI entered into a share purchase agreement with TUSI dated April 20, 2005 (the Agreement), pursuant to which, upon receipt of Board approval as requested in the Application, ULGI will sell the shares of TUC and TWMC to TUSI effective on the closing date, as defined in the Agreement (collectively the Transaction). TUSI is a wholly-owned subsidiary of Terasen Inc. (TI). The Board issued the Notice of the Application on May 17, 2005. Interventions were received from parties listed in Appendix 1. No substantive objections were filed. On June 17, 2005, the Board provided ULGI and TUSI with information requests and responses were provided on July 4, 2005. On July 25, 2005, the MD notified the Board that it had no objection to the transfer of the Franchise Agreement between ULGI and the MD to TUSI. On August 1, 2005, TI1 announced in a news release that Kinder Morgan, Inc. (Kinder Morgan) would acquire all of the outstanding shares of TI and that the transaction would be completed by the end of 2005. In response to this announcement, the Board issued Board Information Request No. 2 to TUSI on August 5, 2005 and TUSI provided a response on August 15, 2005. On September 14, 2005, ULGI filed an amendment to the Agreement.

1 www.terasen.com

EUB Decision 2005-118 (November 2, 2005) • 1

http://www.terasen.com/

Sale of Shares in Thornmark Utilities Corporation and Thornmark Waste Management Corporation Upper Lakes Group Inc.

Upon review of the information on the record for this proceeding, the Board determined that it had sufficient information on which to render its decision on the Application. The Board panel assigned to this application was comprised of Mr. G. J. Miller, Presiding Member, Mr. B. T. McManus, Q.C. Member, and Mr. T. McGee, Member. For purposes of this Decision, the Board considers that the record closed on September 14, 2005. 2 BACKGROUND

On April 16, 1992, the Board gave approval in Order C92025 to the MD to enter into a water supply contract with, and to confer a special franchise on Thornmark Capital Corporation (TCC), in accordance with the terms and conditions of a supply and franchise contract with respect to the supply of water to an area of the MD (the Franchise Area) and its residents for a period of 20 years. Initially, TCC’s water utility was to serve the Heritage Pointe residential development and golf course. Order C92025 indicated that matters such as rates, rate base, depreciation and capital structure had not been tested in the associated proceeding and that these issues and the issue of customer contributions remained undetermined. On September 14, 1992, TCC filed a copy of the rate schedules and water service regulations (collectively the Water Service Regulations). The Board notes that the Water Service Regulations have not been approved by the Board. On October 4, 1993, the Board approved in Decision C93037 the assignment from TCC to TUC of all of its rights under the Franchise Agreement with the MD. Decision C93037 indicated that it did not deal with either the issue of the value of assets, which comprises the rate base of TUC, or the issue of the appropriate capital structure for TUC. On May 5, 1994, TCC underwent an amalgamation proceeding to become known as Thornmark Corporation and on February 18, 1997, Thornmark Corporation amalgamated with ULGI and became known as ULGI. One portion of the mandate of the Board is to regulate investor-owned utilities within the province, including water utilities. In the past, the Board has generally only approved rates for small investor-owned water utilities when complaints from a customer about the charges being imposed could not be resolved. Consistent with the Board’s mandate for setting gas and electric transportation rates, when setting water rates, the Board must maintain a balance between the interests of the regulated utility and its customers. In this regard, the Board notes that it has never approved rates for TUC.

2 • EUB Decision 2005-118 (November 2, 2005)


The Application ULGI indicated that TUC currently serves 446 residential customers, 15 commercial customers and 21 bulk water customers under the Franchise Agreement.2

ULGI requested Board approval to sell or otherwise dispose of 100% of its shares in TUC to TUSI (the TUC Sale). ULGI indicated that the proposed sale would allow it to dispose of an isolated utility business to a purchaser that is part of a group of companies possessing extensive utility experience and operations, and it would also allow ULGI to concentrate on the core real estate development business in Alberta. ULGI submitted that both ULGI and TUSI could benefit through this rationalization, as should those dependent on their services. ULGI submitted that there was unlikely to be any adverse impact from a sale of the shares in the owner of a public utility where, as here, the transfer was from one corporation of substance to another. ULGI indicated that while the business of TWMC was not a public utility regulated by the Board, ULGI was the sole shareholder of TWMC and therefore, ULGI also requested Board approval to sell or otherwise dispose of 100% of its shares in TWMC to TUSI (the TWMC Sale). ULGI noted that TWMC had a parallel customer base with TUC. ULGI indicated that TUSI was a wholly-owned subsidiary of TI. ULGI also noted that TI (formerly BC Gas Inc.) was a publicly traded corporation in Canada which, together with its many subsidiaries, owns approximately $5 billion in assets and has over 2,000 employees throughout western Canada and the United States. According to ULGI, TUSI designs, builds and operates customized water and wastewater utility infrastructure and provides specialty utility services for municipal, institutional and residential customers across Canada and the United States. In addition, ULGI indicated that TUSI provides field metering services, automatic meter deployment, water meter supply and installs conservation programs and has water use operation, rate design, engineering and conservation specialists on staff.3

3 ISSUES

The Board has reviewed the evidence from parties to the proceeding and considers that the main issues that should be discussed in this Decision are as follows:

4.1 The TUC Sale 4.1.1 Regulatory Framework 4.1.2 Impact to Customers

4.1.2.1 Financial Impact 4.1.2.2 Continutity of Safe and Reliable Service 4.1.2.3 Board’s Conclusion on the TUC Sale

4.1.3 Allocation of Proceeds and Need for Holdback

2 BR-ULGI-8(g). ULGI noted that TUC records customers as connections and a single customer may have a

number of connections. 3 The Application, p. 2



4.2 The TWMC Sale 4.3 Designation of the Owner of TUC

4.4 Other Matters

4.5 Future Applications

Any references to specific parts of the record are to assist the reader in understanding the Board’s decision, but should not be taken as an indication that the Board did not consider the entire record as it relates to that issue. 4 DISCUSSION OF ISSUES

4.1 The TUC Sale

4.1.1 Regulatory Framework In this section, the Board will discuss the elements of the existing legislative framework and related regulatory principles that the Board considers necessary to respond to or clarify the relief requested by ULGI. Pursuant to subsection 1(j) and 2(p) of the Designation Regulation (Alberta Regulation 131/2000) (the Designation Regulation), ULGI has been designated as an owner of a public utility to which sections 101, 102 and 109 of the PUB Act apply. TUC provides certain water utility services and is defined as a “public utility” according to section 1(i) of the PUB Act, which reads as follows:

(i) “public utility” means

(i) a system, works, plant, equipment or service for the conveyance of telecommunications,

(ii) any service that is provided principally through telecommunications,

(iii) repealed RSA 2000 cR-4 s61 (2002 c30 s27),

(iv) a system, works, plant, equipment or service for the production, transmission,

delivery or furnishing of water, heat, light or power supplied by means other than electricity, either directly or indirectly to or for the public,

(v) an oil pipeline the proprietor of which is declared by the Energy Resources

Conservation Board to be a common carrier, and

(vi) an electric utility; ULGI requested approval of the TUC Sale, pursuant to section 101(2)(d)(i) of the PUB Act which reads as follows:



101(2) No owner of a public utility designated under subsection (1) shall

(d) without the approval of the Board,

(i) sell, lease, mortgage or otherwise dispose of or encumber its property,

franchises, privileges or rights, or any part of them, or

(ii) merge or consolidate its property, franchises, privileges or rights, or any part of them,

and a sale, lease, mortgage, disposition, encumbrance, merger or consolidation

made in contravention of this clause is void, but nothing in this clause shall be construed to prevent in any way the sale, lease, mortgage, disposition, encumbrance, merger or consolidation of any of the property of an owner of a public utility designated under subsection (1) in the ordinary course of the owner’s business.

In the Board’s view, the substance of the TUC Sale is essentially the sale of a water utility business as a going concern from one regulated utility to another. The Board has held in previous cases that such a sale is not in the ordinary course of business and, therefore, requires approval pursuant to section 101(2)(d)(i) of the PUB Act.4 Therefore, the Board considers that ULGI has properly requested approval of the TUC Sale pursuant to 101(2)(d)(i) of the PUB Act. In Decision 2000-41, approving the original sale of the electric distribution business of TransAlta Utilities Corporation (TransAlta), the Board eschewed technical distinctions between asset and share transactions for analytical purposes in this context:

The Board notes that TransAlta is proposing a series of transactions to effect the sale of its distribution business. These transactions involve both the sale of assets, the transfer of underlying obligations and the assumption of certain related liabilities to a subsidiary followed by the sale of shares of that subsidiary. The Board considers that it need not determine in this case whether the transactions should, as a whole, be characterized as an asset sale or share sale. Regardless of how the transactions are structured, and as already noted by the Board, what TransAlta is proposing in substance is the sale by one regulated entity of its entire distribution business as a going concern, including its customers, to another regulated entity. It is against this backdrop that the Board considers its review of the Application must be carried out. In other words, it is to the substance of the transactions to which the analytical framework adopted by the Board must be applied. It is to that framework that the Board will now turn.5

The Board will consider the TUC Sale according to this general principle. In other words, the same test and analytical approach will be taken with the TUC Sale as would be taken with an asset transfer or a mixed asset/share transfer. As indicated, the Board considers that the TUC Sale amounts, in substance, to the sale of a water utility business as a going concern from one regulated utility to another. In the past, the Board has held that the standard to be applied in determining whether approval of a sale such as this is 4 See, for example, Decision 2000-41, p. 7 5 Decision 2000-41, p. 6


http://www.eub.gov.ab.ca/BBS/documents/decisions/2000/2000-41.pdf


in the public interest is the so-called “no-harm” standard. In Decision 2000-41, the Board distilled this principle from a number of previous decisions when TransAlta originally applied for approval to sell its distribution business.6 A recent expression of the “no-harm” test by the Board was made in its consideration of the sale by ATCO Gas and ATCO Electric to Direct Energy Marketing Limited of ATCO’s retail gas and electric businesses (ATCO Retail Sale). In Decision 2003-098, the Board said the following:

Section 101(2) of the PUB Act and section 26(2) of the GUA do not specify the appropriate test for the Board to utilize when considering an application under these provisions. Without specific legislative guidance, the Board has employed a “no-harm” standard or test when evaluating applications to dispose of rate base assets out of the ordinary course of business under section 101(2)(d)(i) of the PUB Act and section 26(2)(d)(i) of the GUA. The Board’s no-harm test considers the transaction in the context of both potential financial impacts and service level impacts to customers. The Board also assesses the prudence of the sale transaction. As well, the Board considers whether the availability of future regulatory processes might be able to address any potential adverse impacts that could arise from a transaction.7

The “no-harm” standard, or test, is used to weigh the potential positive and negative impacts of proposed sales on customers to ensure that customers are at least no worse off after the transaction, subject to the caveat that they are not entitled to a level of regulatory certainty that would not have been obtained in the absence of the sale.8 If the Board concludes that customers could be harmed by a proposed sale, the Board will consider whether the harm can be mitigated by attaching appropriate conditions to its approval. The types of potential harm that would apply to this Application and that the Board has expressed a past interest in testing are: financial impacts and continuity of safe and reliable service, which are discussed in Section 4.1.2.1 and 4.1.2.2 respectively. The Supreme Court of Canada has stated that the Board’s jurisdiction to “safeguard the public interest in the nature and quality of the service provided to the community by public utilities” is “of the widest proportions.”9 The Board has stated in previous decisions that it may attach conditions to its approval of applications pursuant to section 101 of the PUB Act.10 The source of this jurisdiction is found both in the Board’s general supervisory jurisdiction over public utilities and section 15(3)(d) of the Alberta Energy and Utilities Board Act (AEUB Act), which reads:

15(3) Without restricting subsection (1), the Board may do all or any of the following: (d) with respect to an order made by the Board, the ERCB or the PUB in respect of

matters referred to in clauses (a) to (c), make any further order and impose any additional conditions that the Board considers necessary in the public interest.

6 Decision 2000-41, pp. 7-8 7 Decision 2003-098, p 4 8 Decision 2004-035, pp. 7, 12 9 ATCO Ltd. v. Calgary Power Ltd. [1982] 2 S.C.R. 557, at 576 (per Estey J.) 10 Decision 2000-41, p. 7 and footnote 11; Decision 2003-098, p. 7



http://www.eub.gov.ab.ca/bbs/documents/decisions/2003/2003-098.pdf


4.1.2 Impact to Customers In this section, the Board will assess and determine whether it is in the public interest to allow the TUC Sale. In particular, the Board will consider the potential positive and negative impacts of the proposed sale to determine whether customers will be “harmed” according to the regulatory principles outlined earlier in this Decision. In making its assessment, the Board will consider the following:

• The financial impact of the sale transaction, including any benefits arising from the transfer of ownership of TUC from ULGI to TUSI; and

• TUC’s provision of safe and reliable utility service to its customers under TUSI’s

ownership. In the following sections, the Board considers the impact of the TUC Sale on the continuity of safe and reliable service, potential positive impacts arising from the sale, and the risk of harm to customers as a result of future rate changes. In relation to the latter consideration, the Board has typically identified the recovery of any premium paid to acquire a utility business as one potential risk, with premium typically being defined as the positive difference between the sale proceeds and the net book value of utility rate base assets. If the Board concludes that customers may be harmed, the Board will consider whether any identified harms can and ought to be mitigated through appropriate approval conditions. The Board will also determine whether all of the proceeds of the TUC Sale should accrue to ULGI upon completion of the transaction, or whether the proceeds should, to some extent, be shared with ratepayers. ULGI asserted that since TUSI would be acquiring TUC and TWMC as going concerns, the acquisition will not affect the cost of service to TUC customers, nor will it impact the ability of TUC to continue to deliver safe, adequate and proper water service.11

4.1.2.1 Financial Impact

As already indicated, one of the measures of the potential harm to customers of a sale of a business or a portion of a business is the expected financial impact on customers. In previous Board decisions dealing with the sale of a business, the Board considered that customers should remain at worst “cost neutral” as a result of a sale. Generally this has included ensuring that any premium paid for the purchase of a business would not be recovered through rates.12

In this section, the Board will assess the impact of the sale transaction, including any benefits arising from the transfer of ownership of TUC from ULGI to TUSI. This assessment will include a brief review of the rates and services provided by TUC under the ownership of ULGI and the future plans of TUSI with respect to the management and operation of TUC. ULGI and TUSI submitted that the TUC Sale would result in no negative financial impact to TUC or its customers.13 14

11 Application, p. 4 12 Decision 2003-098, p. 12 13 Application, p. 3



ULGI indicated that, as one of the conditions of approval for the development of the Heritage Pointe residential development and golf course, ULGI (then TCC) had to provide water and wastewater treatment services to the community of Heritage Pointe. In addition, ULGI indicated that it was required to enter into the Franchise Agreement with the MD which governed the provision of water services not only to Heritage Pointe but also to a significant surrounding area. ULGI indicated that it entered into the water and wastewater treatment businesses with some reluctance because it was not part of its long term strategic business plan to be a utility services provider. ULGI indicated that the view of the Board of Directors of ULGI was unchanged in this regard. ULGI indicated that with the continued growth and development of Heritage Pointe and corresponding growth of the utility companies, the ULGI Board considered it appropriate to sell its interest to a utility company which was focused on the utility business and anxious to grow TUC and TWMC and potentially expand the utilities in the Franchise Area.15

ULGI submitted that it will continue to develop its land holdings and explore new land development opportunities as they arise. ULGI indicated that the sale of TUC and TWMC would have no impact on the ownership, operation and strategic plans for the land development company or Heritage Pointe Golf Club. ULGI indicated that the interests of its customers would be best served in the future by selling these isolated non core assets and in doing so, would give ULGI more opportunity to concentrate on its core real estate development business.16

With respect to potential benefits to current and future TUC customers, ULGI submitted that TUSI will bring a broader depth of management expertise and operational experience to a growing company.17 TUSI submitted that it had solid financial backing with a demonstrated commitment to further investment in the water and wastewater sectors.18

In this regard, the Board notes that TUSI is a wholly-owned subsidiary of TI, that TI is a 100% shareholder-owned company and that the TI group currently has an ownership role in several water and wastewater utilities. TUSI indicated that TI’s business plan was to invest in the water and wastewater utility sectors in order to generate secure and consistent returns that complement its regulated natural gas and pipeline investments. TUSI indicated that together with two of its subsidiaries, TI has a thirty-year history in the water utility supply and services industry. TUSI also noted that TI or its subsidiaries owned and operated two water utility systems in British Columbia. TUSI also noted that TI or its subsidiaries operated twenty-five water systems in Alberta. TUSI also noted that it owned and operated one water system.19

Regarding the recent announcement that Kinder Morgan would acquire all of the outstanding shares of TI, TUSI claimed that the acquisition would give TI increased scale, resources and access to capital to allow TI to accelerate its business strategy. TUSI has also stated that the potential exists for such acceleration to have a positive impact on TUSI’s own business strategy producing long-term benefits for the customers of TUC.20

14 BR-TUSI-9 15 Letter from ULGI to TUC and TWMC customers dated May 24, 2005 16 Letter from ULGI to TUC and TWMC customers dated May 24, 2005 17 BR-ULGI-13 18 BR-TUSI-9 19 BR-TUSI-7 20 BR-TUSI-12(b)



TUSI submitted that the customers of TUC will benefit from having an owner that is 100% focused on the water utility business instead of an entity whose focus has been real estate development. Under its ownership, TUSI claimed that customers will have access to a wide range of expertise related to water treatment and distribution, as well as access to TI’s considerable corporate and financial resources. TUSI submitted that the TI group has an established reputation for corporate responsibility, high quality service and a demonstrated commitment to sustain and grow the water business.21

ULGI indicated that the possible expansion of TUC in the Franchise Area would be enhanced given TI’s stated desire to grow the water business. ULGI submitted that with a larger customer base, customers may benefit from lower overall fixed costs. In addition, ULGI indicated that there may be opportunities for economies of scale in the day to day operations of the utility companies due to TUSI’s association and relation with a much large utility based group of companies. ULGI also indicated that it anticipated that TUSI would bring expertise to TUC’s operations in the area of technological improvements, particularly with respect to wireless process control management.22

TUSI submitted that it has demonstrated experience in water-related operations and customer service and that it currently provides utility services that were of direct relevance to TUC’s operations.23

The Board recognizes that the change in TUC’s ownership from ULGI to TUSI could influence cost and service delivery matters in the longer term. The Board considers that customers in the TUC service territory could benefit from TUSI’s ownership of TUC. It appears to the Board, on the basis of the record before it, that TI has considerable experience in the ownership and operation of utilities in general, including water and wastewater services. Under the umbrella of the TI group of companies, TUC would, in the Board’s view, have access to this experience in delivering water services. In the Board’s further view, whatever synergies may arise among the Kinder Morgan and TI group have potential benefit for TUSI and for TUC’s customers. If approval of the TUC Sale is granted, TUC’s current owner, which apparently became a reluctant utility provider, would be replaced with an owner with access to extensive experience in water service and wastewater operations and customer service through its affiliated companies. The Board views this change as a benefit to customers, albeit one that is intangible and hard to quantify. The Board considers that the change in ownership should provide immediate positive impacts for TUC customers in terms of stability and longer-term commitment to the provision of regulated water service. With respect to the risk of harm to customers as a result of future rate changes, the Board first provides some background information on the evolution of rates for TUC that highlights the fact that such rates were initially, and are currently, market based rates. The Water Service Regulations filed on September 14, 1992, included rate schedules which included charges for various water related services (the Original Contemplated Charges). 21 BR-TUSI-11 22 BR-ULGI-13 23 BR-TUSI-9



On June 18, 1993, in the hearing that dealt with the assignment from TCC to TUC of all of its rights under the Franchise Agreement and which resulted in Decision C93037,24 TUC indicated that customers would not be charged to connect to the water system and that the Original Contemplated Charges were competitive according to an extensive survey of water rates throughout southern Alberta. TUC also indicated that water rates would need to be competitive to ensure the marketing of home sites. Given the market conditions at the time, TUC assured the Board that it had no intention of coming back before the Board within a period of time for a rate increase. Based on the proforma statements provided by TUC at that time, for the six-year period ending March 31, 1999, TUC projected no increases in rates and appeared prepared to accept losses or low net earnings. However, as the original developer of Heritage Pointe, ULGI indicated that it made the decision not to charge a turn on fee or meter handling fee for any customer. ULGI also indicated that, solely for marketing reasons, TUC initially made the decision to charge a lower fixed charge and lower commodity charge than outlined in the Original Contemplated Charges.25

ULGI also indicated that TUC does not currently operate in accordance with all of the Water Service Regulations, in that it has not exacted, and does not exact, the full charges as provided therein. ULGI indicated that where TUC has charged less or waived charges altogether, it has done so in a consistent, non-discriminatory fashion, benefiting all like customers at the time in the same manner. ULGI also indicated that urban consumption has declined over the past number of years due in part, to the high cost of water.26

Tables 1 and 2 show the Original Contemplated Charges and also the current charges TUC has in place. ULGI indicated that TUC has utilized the Water Service Regulations as a guide since 1992 and that TUC has not utilized any other regulations or schedules.27 With respect to TUC, the Board notes it has not tested matters such as rates, rate base, depreciation and capital structure in any proceeding and that these issues and the issue of customer contributions remain undetermined. Table 1. Schedule “A” Charges: Original Contemplated versus Current Service Customer Original Contemplated Charges Current Charges Turn-on Fee Residential $25.00 $0 Turn-on Fee Non-Residential Actual Cost $0 Meter Handling Fee Residential $40.00 $0 Meter Handling Fee Non-Residential Actual Cost $0 Dishonoured Cheques $10.00 $10.00 Late Payment Charge When Accounts are not paid in full on or before due date, the

amount relating to the current month’s charge unpaid by the due date shall be increased by 5% and the increased amount shall become payable.

2% a month

Data Sources: Water Service Regulations and BR-ULGI-8(b) 24 Decision C93037 dated October 4, 1993 regarding TCC and TUC, p. 10 25 BR-ULGI-8(a) 26 BR-ULGI-8(a) 27 BR-ULGI-8(c)



Table 2. Schedule “B” Charges: Original Contemplated versus Current Customer Class Original Contemplated & Current

Fixed Charge ($/month)

Original Contemplated Commodity Charge

($/m3)

Current Commodity Charge

($/m3) Urban $40.00 $1.60 $1.41 Commercial $40.00 $1.40 $1.40 Bulk/Truck Fill $0 $1.20 $1.20 Data Sources: Water Service Regulations and BR-ULGI-8(b) TUSI indicated that it did not expect the TUC Sale to have any impact on the rates and charges currently paid by TUC customers.28 TUSI also indicated that TUC operators may share responsibility with other systems in the Calgary area. TUSI submitted that there would be no impact on customer rates as a result.29

In a letter dated May 24, 2005, provided to all TUC customers, ULGI indicated that, subject to any issues or directives that may come as a result of the Board’s ruling regarding the Application, it was assured by TUSI that it did not intend to increase utility rates for the balance of the 2005 operating year. TUSI described its understanding that TUC’s current rates and charges were equal to or less than the Original Contemplated Rates. TUSI also noted that it understood that TUC commenced operations charging rates substantially lower than the Original Contemplated Rates and that TUC had introduced modest increases from time to time as deemed appropriate by TUC in the circumstances. TUSI also noted that upon approval of the TUC Sale, TUSI intends to continue with this practice established by TUC over the last decade. TUSI also indicated that it did not foresee a need to apply for Board approval of the rates and terms and conditions of service in the near future.30

On July 4, 2005, TUSI indicated that it planned to continue operating TUC according to current practices and, barring unforeseen circumstances, had no plans for a rate application in the next five years.31

The evidence before the Board indicates that TUC’s current market based rates or charges have not been approved by the Board and that TUSI does not have any plans in the near term to change the current rates or charges associated with the water services. On this basis, the Board is of the view that TUSI’s acquisition of TUC should not have any significant immediate or near term effect on the cost of service to TUC’s customers. However, as noted above, the Board recognizes that the change in TUC’s ownership from ULGI to TUSI could influence cost and service delivery matters in the longer term. In this regard, one potential negative impact for customers that is usually discussed in sale proceedings is the possibility that the purchaser may seek to recover any premium paid for the business over the book value of the assets. Traditionally, customers that pay regulated rates would be “harmed” in

28 BR-TUSI-4(d) 29 BR-TUSI-5(e) 30 BR-TUSI-4(g) 31 BR-TUSI-4(h)



the relevant sense by recovery of the premium since they would not have faced this potentially significant impact in the absence of the sale. In previous Decisions, the Board has held that recovery of any of the premium associated with sale of assets and sale of shares transactions through customer rates would not be appropriate.32 These previous Decisions have usually been based on the situation where the particular utility has had rates established using a traditional regulated rate methodology which relied on original cost of assets (less accumulated depreciation) and other costs, rather than on market forces. In the current situation, TUSI has claimed that it expects a negative premium or discount to book value in its purchase of the TUC shares.33 TUSI submitted that the estimated $125,000 discount was based on the agreed purchase price of $3,225,00034 compared to the book value of $3,350,000,35 as projected at the initial expected closing date.36 TUSI also indicated that since the purchase of the TUC shares would be recorded by TUSI, any discount or premium would be reflected in the accounts of TUSI. TUSI also indicated that there was no expectation that TUC’s account would be affected by the TUC Sale because TUC was not a party to the sale. TUSI also noted that in the event that a premium or discount were recorded in the accounts of TUC, TUSI would find it appropriate to segregate the item as a non-utility item and exclude it from future rate base calculations.37 TUSI indicated that it does not expect any differences between the purchase price and book value to be considered in setting rates.38

While TUSI notes that it was not expecting to pay a premium to book value of the assets, the Board still considers that such a possibility exists, given that the book value was estimated for the expected closing date. The Board notes that TUSI, on behalf of TUC, does not plan to file for a change in rates following the TUC Sale and, therefore, there is no immediate possibility for any potential premium paid to ULGI to be recovered via customer rates. Nevertheless, while the Board recognizes that utilities involved in most past sale proceedings have not had market based rates, the Board considers it in the public interest, as it has found in previous decisions, to formalize TUSI’s commitment not to seek recovery of any potential premium from customers. Therefore, the Board will condition any approval of the TUC Sale so that any potential premium cannot be recovered from customers. Beyond the premium, the Board does not consider there to be any other evidence of any material financial impact on customers that would require mitigation by the Board through the imposition of further conditions. The Board considers that its oversight of TUC (and TUSI, should the TUC

32 See particularly Decision 2000-41, pp. 20-21 33 BR-TUSI-1(a) 34 On September 14, 2005, ULGI filed an amendment to the Agreement that included a reallocation of the total

purchase price between the TUC shares and TWMC shares so that the updated purchase price for TUC shares and TWMC shares was $3,000,000 and $300,000 respectively.

35 TUSI indicated that the book value was based on TUC’s historical cost of all used and useful water treatment plant and distribution systems minus developer contributions received and minus accumulated depreciation to date and it excludes the impact of a 1995 accounting write-down.

36 BR-TUSI-1(b) 37 BR-TUSI-1(c) 38 BR-TUSI-1(e)



Sale be granted and TUSI becomes a designated public utility) will be sufficient to address and resolve any issues that may arise subsequent to the transfer of the ownership of TUC from ULGI to TUSI. The Board considers that TUC’s future initial tariff application and other potential regulatory processes will provide an appropriate and effective forum in which to address any potential cost of service and tariff concerns of TUC’s customers. 4.1.2.2 Continutity of Safe and Reliable Service ULGI and TUSI submitted that the TUC Sale was not expected to have any negative impact on TUC’s delivery of regulated service to its customers in the MD. ULGI and TUSI argued that if the Board approves the TUC Sale, the change in ownership of TUC was, from a service level perspective, expected to be seamless and TUC would continue to operate in the ordinary course in accordance with industry practice.39 40 TUSI confirmed that if the Application was approved, the service levels associated with the water services provided by TUC would be at least equivalent to those provided by TUC currently.41 TUSI also confirmed that if the Application was approved, TUC would provide service to customers according to the water service regulations currently used by TUC.42

With respect to continuity of management and expertise in TUC, TUSI indicated that the directors and officer positions would be filled by employees of TUSI and/or TUSI affiliates and these appointees would have an appropriate level of expertise in water utility operations and management.43 ULGI noted that the current Facilities Manager and the three certified operators on staff would remain with TUC, providing continuity in terms of the day to day operations of the utility companies.44 TUSI indicated that it would offer employment to all of the operators currently providing services to TUC on substantially the same terms and conditions as offered by the current employer.45

TUSI indicated that TUC operators may share responsibility with other systems in the Calgary area and there may be improvements in overall service quality due to increased training opportunities for TUC operators.46

TUSI also indicated that it understood that all billing, accounting and other administrative functions were handled by ULGI and the costs for these services were recovered by way of management fees payable by TUC. TUSI indicated that it planned to continue with this practice as its management and administrative functions were also centralized.47

TUSI indicated that it would rely on assistance from ULGI for a transition period after the sale to ensure a seamless transition as far as water services to customers were concerned. TUSI also

39 Application, p. 4 40 BR-TUSI-9 41 BR-TUSI-4(c) 42 BR-TUSI-4(e) 43 BR-TUSI-5(b) 44 BR-ULGI-1(a) 45 BR-TUSI-5(f) 46 BR-TUSI-5(e) 47 BR-TUSI-5(b)



noted that it and ULGI were aligned in this regard because both companies have an interest in the successful completion of the Heritage Point development.48 The Board notes that the Agreement indicates that ULGI and TUSI will enter into an agreement (the Protocol Agreement) governing the relationship of ULGI and TUC/TWMC.49 According to a draft version of the Protocol Agreement, ULGI and other partners are planning to develop a comprehensive residential development on certain lands in the MD that are contained within the Franchise Area. ULGI noted that the Protocol Agreement will provide a framework and governance to ULGI and TUSI with respect to the future expansion of TUC and TWMC.50 The purpose of the Protocol Agreement is to set out certain parameters within which the parties to the agreement agree that TUC and TWMC will provide water services and sewer services with respect to certain lands in the MD.51 The Board also notes that the draft version of the Protocol Agreement indicates that the water services and sewer services will be provided in compliance with the Franchise Agreement and the Water Service Regulations filed or approved by the Board.52 The Board also notes that the terms and conditions of the Franchise Agreement shall govern to the extent that any term or condition of the Protocol Agreement conflicts with the terms and conditions of the Franchise Agreement.53 ULGI submitted that there should be no negative impact with respect to service or cost of service on TUC’s customers resulting from the Protocol Agreement and that from ULGI’s perspective, the Protocol Agreement was intended to help maintain the status quo with respect to TUC’s operations.54

With regard to the integration between TUC and TWMC, ULGI indicated that TUC staff and TWMC staff operate as a team to serve the needs of TUC and TWMC customers. ULGI submitted that operators are trained and familiar with the operations of both utilities and offer back up support and share operational training and expertise if and when required. ULGI also noted that since the billing system and administrative support staff were also shared, the economic and efficient operation of both utilities was enhanced.55 TUSI submitted that it had no plans for changes to these relationships and that it expected a seamless transition for customers of both companies.56

Given that TUSI has supported the continuity of TUC staff and continued integration of TUC staff and TWMC staff, the Board considers that TUC customers should not be harmed with respect to the delivery of safe and reliable water service.

48 BR-TUSI-5(b) 49 The Agreement, p. 24, section 5.02(f) 50 BR-ULGI-17 51 Thornmark Protocol Document, draft dated June 29, 2005. 52 Thornmark Protocol Document, draft dated June 29, 2005, p. 2, clause 1. 53 Thornmark Protocol Document, draft dated June 29, 2005, p. 9, clause 13. 54 BR-ULGI-17 55 BR-ULGI-14 56 BR-TUSI-5(g)



The Board recognizes that, even though TUC will continue as the operating water utility once the TUC Sale is completed, TUSI as the parent company can influence how TUC provides water services to its customers. In this regard, ULGI and TUSI submitted that the TUC Sale would result in immediate and long term service level improvements in terms of stability, ready access to expertise and other resources not possessed by TUC and TWMC, and a long-term commitment by TI to maintain and grow its investments in the water and wastewater sectors so as to ensure the provision of a high quality of service. ULGI and TUSI argued that TUSI has demonstrated experience in water-related operations and customer service such that TUC and TWMC customers in the MD will benefit from TUSI’s considerable experience in delivering such services.57 58

The Board has already set out its view that TUSI’s ability to leverage the knowledge and experience of its affiliates within the TI group may have positive results in ensuring that TUC delivers safe and reliable water services to its Alberta customers. The Board notes that no one challenged the credentials of TUSI to operate the TUC water system. While the Board does not consider ULGI’s preference to exit the utility business to be a significant risk to the disruption to safe and reliable service to TUC’s customers, the Board considers that the change in ownership from ULGI to TUSI should enhance the ongoing provision of safe and reliable service to TUC customers. For all of these reasons, the Board is satisfied that TUC’s customers should receive safe and reliable water services under TUSI’s ownership. 4.1.2.3 Board’s Conclusion on the TUC Sale In the previous sections, the Board concluded that there were no material negative impacts associated with TUSI’s acquisition of the TUC shares from ULGI. The Board also formed the view that potential benefits could result from the transfer of TUC’s ownership from ULGI to TUSI. Furthermore, the Board concluded that TUSI, as an owner of TUC, had the necessary parental organizational structure and experience to positively influence the management and operations of TUC, thereby ensuring that TUC’s customers receive safe and reliable water services. The Board notes that, with respect to these types of applications, any potential benefits are generally intangible and harder to quantify. The Board notes that one persuasive factor in any sale is that a company that wants to be in the business is replacing one who wishes to exit the business. The Board also notes that it has no evidence before it to discount the various claims made by ULGI and TUSI discussed above. In addition, the Board does not consider that the introduction of new shareholders through the sale of shares in TUC would jeopardize the integrity and operation of the water facilities as it is ultimately the value and strength of the water business which will determine its attractiveness as an investment and it is in the interest of the owners to

57 The Application, p. 4 58 BR-TUSI-9



operate the utility business in a prudent and profitable manner so as to ensure that existing and future investment is maintained and enhanced. The Board considers that the only conditions required are those prohibiting recovery of any potential premium from customers and, as discussed below in Section 4.3, deeming TUSI to be a designated owner of a public utility for the purposes of sections 101, 102 and 109 of the PUB Act. Therefore, subject to these conditions, the Board has concluded that the TUC Sale will not harm customers and is in the public interest. Accordingly, the Board approves ULGI’s application to sell 100% of its TUC shares to TUSI. The Board will reflect this approval in the Order section of this Decision. 4.1.3 Allocation of Proceeds and Need for Holdback In some previous sale proceedings, customers have requested an allocation of the sale proceeds and in those proceedings, customers have also requested that the Board order some amount of holdback from the payment to the selling entity to mitigate and potentially obviate harm to customers if the sale was approved. Customer have argued in the past that it is conceivable that any number of problems may not surface until at least the first rate application of the utility under new ownership and that the Board has the jurisdiction to order a holdback with appropriate conditions for release, including partial release pending completion of the first rate application for the utility that is under new ownership and management. In this case, any excess of purchase price over net book value would yield an accounting gain on the sale for ULGI. From TUSI’s perspective, any excess of the purchase price over book value represents a premium it would have to pay to acquire the shares in TUC. In light of the Board’s view that the TUC Sale amounts, in substance, to the sale of a public utility as a going concern from one regulated owner to another, the Board finds that the principle established in Decision 2000-41 respecting the allocation of sale proceeds clearly applies. On page 28 of Decision 2004-41, the Board notes that:

In a case such as this one, however, where the entire utility business is being sold as a going concern from one regulated entity to another, different considerations apply. Recognizing that each such case must be decided according to its own merits, as a general rule and where, on balance the Board is satisfied that customers will be at least no worse off after the sale, the Board is of the view that shareholders are entitled to the gain on sale (or must bear the loss, as the case may be). There are a number of considerations leading the Board to this general conclusion. For example, if the assets continue to be subject to regulation, the new owner will still be entitled to earn a return on those assets and a return of his investment in them. If the assets are later sold out of rate base for an amount in excess of net book value, customers will ordinarily be entitled to the gain on sale in accordance with the TransAlta Appeal principle. To award a gain to customers in the circumstances of this Application would set customers up for a potential windfall in the future if the assets were again sold at a premium over net book value. As well, because the assets remain in rate base, customers continue to receive regulated service




from those assets at regulated rates. They also benefit from the lower rate of return the owner will be entitled to earn on the lower net book value of the assets.59 The Board believes that these principles are consistent with the regulatory compact referred to by many of the participants. The Board considers that a fundamental principle of the regulatory compact is that the distribution of a gain or loss on the sale of a utility asset should be allocated based on who took the financial risk associated with the asset.

As discussed in Decision 2000-41, in the case of a sale of an operating utility business, one of the risks is that the purchase price will exceed or be less than the value of the system on the vendor’s books, thus creating an accounting gain or loss. The Board notes that the revised purchase price for the TUC shares is $3,000,00060 and that TUSI estimated the book value of TUC to be $3,350,000 on the initial expected closing date.61 However, the Board also notes that this book value does not include the 1995 accounting write-down in the book value of the water treatment and distribution assets which was calculated as the excess of the book value over the fair value which was determined by generated net realizable cash flows from the operations.62 According to the unaudited balance sheet of TUC as at September 30, 2004, which apparently reflects this write-down, the net book value was $355,055.63 TUSI submitted that this write-down was not relevant for rate setting purposes, and on that basis, planned to segregate the impact of the write-down as a non-utility item and exclude it from the calculation of rate base. In jurisdictions such as Alberta where traditional regulated rate making is based on the original cost of the assets (less accumulated depreciation) rather than market value, the risk of a loss consequent upon the sale of the business falls on shareholders. In contrast, ratepayers are shielded from fluctuations in market value because rates are based on original cost less accumulated depreciation. Viewed another way, if customers are to receive the benefit of the difference between fair market value and original cost in these circumstances, they should also bear the accompanying risk of paying rates based on the fair market value of the assets. To date, ULGI has not been operating under traditional regulated rate making for TUC, and instead been operating under market based rates. However, it is expected that in the future, the Board will establish regulated rates for TUC. Therefore, the Board considers that the relative risk between shareholders and customers should be maintained because customers will continue to receive the same service from the same assets and although, rate base has never been established for TUC, the Board considers that the assets to be determined as rate base prior to the sale should remain at the same value immediately after the sale. In addition, the Board will require that customers will be shielded from any future increase in rate base because the new owner is prevented from including any premium over book value in any future rate base valuations. Accordingly, the Board considers it appropriate for any gains or loss on the TUC Sale to accrue to ULGI.

59 Tr., pp. 863-864 60 On September 14, 2005, ULGI filed an amendment to the Agreement that included a reallocation of the total

purchase price between the TUC shares and TWMC shares so that the updated purchase price for TUC shares and TWMC shares was $3,000,000 and $300,000 respectively.

61 BR-TUSI-1(b) 62 Note 3 to the TUC Financial Statements, for the year ended December 31, 2003, p. 3 63 BR-ULGI-3



In this circumstance, the Board considers that the regulatory compact will be preserved as the entire water utility business is being sold as a going concern from one regulated utility to another. In the absence of a finding of identifiable financial harm to customers that cannot otherwise be mitigated than through an allocation of sale proceeds to customers, all of the sale proceeds accrue to the vendor, in this case ULGI. There is no evidence before the Board of an identifiable financial harm to customers that cannot otherwise be mitigated such that an allocation to TUC customers would be required. Nor is there any evidence before the Board of the real nature and magnitude of any potential harm on which the Board could base any reasonable conclusion about the amount and/or duration of a holdback. On this basis, the Board concludes that it would not be reasonable or in the public interest to require a holdback in the circumstances of the TUC Sale. In the Board’s view, its ongoing regulatory oversight of TUC and TUSI provide sufficient assurance that any difficulties that may be encountered post-closing can be addressed without exposing customers to “harm” in the relevant sense.64

In the absence of a finding of harm, the Board will not make a determination on the appropriateness of the purchase price associated with the TUC Sale. Beyond those conditions addressed earlier in this Decision, relating to recovery of any potential premium, and later in this Decision, with respect to deemed designation of TUSI under the PUB Act, the Board finds no reason to attach any further conditions to its approval of ULGI’s sale of its TUC shares to TUSI. 4.2 The TWMC Sale ULGI requested Board approval of the TWMC Sale pursuant to section 101(2)(d)(i) of the PUB Act. As discussed earlier in this Decision, ULGI is designated as an owner of a public utility to which sections 101, 102 and 109 of the PUB Act apply. The Board agrees with ULGI that pursuant to section 101(2) of the PUB Act, ULGI may not sell or otherwise dispose of its property, franchises, privileges or rights, or any part of them other than in the ordinary course of ULGI’s business unless it has first obtained approval from the Board for such sale or disposition and an Order of the Board authorizing such sale or disposition. Section 101(2) of the PUB Act is reproduced below:

101(2) No owner of a public utility designated under subsection (1) shall

(a) issue any

(i) of its shares or stock, or

(ii) bonds or other evidences of indebtedness, payable in more than one year from the date of them,

64 This is consistent with the idea that customers are not entitled to a level of regulatory certainty they would not

otherwise have enjoyed in the absence of the transaction.



unless it has first satisfied the Board that the proposed issue is to be made in accordance with law and has obtained the approval of the Board for the purposes of the issue and an order of the Board authorizing the issue,

(b) capitalize

(i) its right to exist as a corporation,

(ii) a right, franchise or privilege in excess of the amount actually paid to the

Government or a municipality as the consideration for it, exclusive of any tax or annual charge, or

(iii) a contract for consolidation, amalgamation or merger, (c) without the approval of the Board, capitalize any lease, or

(d) without the approval of the Board,

(i) sell, lease, mortgage or otherwise dispose of or encumber its property,

franchises, privileges or rights, or any part of them, or

(ii) merge or consolidate its property, franchises, privileges or rights, or any part of them,

and a sale, lease, mortgage, disposition, encumbrance, merger or consolidation

made in contravention of this clause is void, but nothing in this clause shall be construed to prevent in any way the sale, lease, mortgage, disposition, encumbrance, merger or consolidation of any of the property of an owner of a public utility designated under subsection (1) in the ordinary course of the owner’s business.

The Board shares the view of ULGI in that its shares in TWMC are property of ULGI and approval of the Board of the sale of the TWMC shares is appropriate.65

The Board also notes that TWMC is a wastewater utility and not a “public utility” as defined in section 1(i) of the PUB Act which is reproduced below:

(i) “public utility” means

(i) a system, works, plant, equipment or service for the conveyance of telecommunications,

(ii) any service that is provided principally through telecommunications,

(iii) repealed RSA 2000 cR-4 s61 (2002 c30 s27),

(iv) a system, works, plant, equipment or service for the production, transmission,

delivery or furnishing of water, heat, light or power supplied by means other than electricity, either directly or indirectly to or for the public,

65 The Application, Background, clause 3, p.2



(v) an oil pipeline the proprietor of which is declared by the Energy Resources

Conservation Board to be a common carrier, and

(vi) an electric utility; While the Board notes that TUC and TWMC have a common customer base, the Board does not consider it appropriate to consider the impact of the TWMC Sale on the non-regulated wastewater utility business. The Board agrees with ULGI that the business of TWMC is not a public utility regulated by the Board and therefore, the Board does not have the necessary jurisdiction and power to deal with TWMC. However, the Board does consider it appropriate to assess the impact of the TWMC Sale on the regulated water utility service provided to TUC customers. The Board notes that ULGI submitted that the Transaction would result in immediate and long term service level improvements in terms of stability, ready access to expertise and other resources not possessed by TUC and TWMC, and a long-term commitment by TI to maintain and grow its investments in the water and wastewater sectors so as to ensure the provision of a high quality of service.66

TUSI submitted that it has solid financial backing with a demonstrated commitment to further investment in the water and wastewater sectors.67 In this regard, the Board notes that TUSI is a wholly-owned subsidiary of TI and that the TI group currently has an ownership role in several water and wastewater utilities. TUSI indicated that TI’s business plan was to invest in the water and wastewater utility sectors in order to generate secure and consistent returns that complement its regulated natural gas and pipeline investments.68

Given the current integration between TUC and TWMC discussed earlier in this Decision,69 the Board takes comfort in the fact that the Application requests approval of the sale of the TUC shares and TWMC shares to the same entity concurrently. As discussed earlier in this Decision, the Board considers that the change in ownership from ULGI to TUSI should enhance the ongoing provision of safe and reliable service to TUC customers. The Board notes that TUSI supports the continuity of TUC staff and continued integration of TUC staff and TWMC staff. In addition, the Board notes that ULGI claimed that, since TUSI is acquiring TUC and TWMC as going concerns, the Transaction would not affect the cost of service to TUC’s customers, nor would the Transaction impact the ability of TUC to continue to deliver safe, adequate and proper water service.70

66 The Application, p. 4 67 BR-TUSI-9 68 BR-TUSI-7 69 ULGI indicated that TUC staff and TWMC staff operate as a team to serve the needs of TUC and TWMC

customers and that operators are trained and familiar with the operations of both utilities and offer back up support and share operational training and expertise if and when required. ULGI also noted that the billing system and administrative support staff are shared.

70 The Application, p. 4



In approving the TWMC Sale, the Board must be satisfied that the sale would not undermine the ability of TUC to provide safe and reliable service at just and reasonable rates. In this regard, the Board does not have any evidence before it to dispute the claims made above by ULGI and TUSI. Therefore, on the basis of the reasons set out herein, the Board approves the TWMC Sale because it appears to pose no public interest issues. As discussed earlier in this Decision, the Board notes that TUSI, on behalf of TUC, does not plan to file for a change in rates following the TUC Sale and while the Board notes that TUSI confirmed that no portion of the purchase price for the TWMC shares would be recovered within charges for water services to TUC’s customers,71 the Board still considers it in the public interest to formalize such commitment from TUSI. Therefore, the Board will condition any approval of the TWMC Sale so that no portion of the purchase price will be recovered from TUC customers. 4.3 Designation of the Owner of TUC ULGI is currently listed in the Designation Regulation as an owner of a public utility in Alberta: namely the owner of TUC. Notwithstanding its presence as an operator of water and wastewater public utilities in Alberta, TUSI is not presently the owner of any such utilities and is accordingly not designated in the Designation Regulation as an owner of a public utility in Alberta. The effect of approving the Application will be to allow the Agreement to close, whereupon TUSI will become the owner of 100% of the issued and outstanding shares of both TUC and TWMC. At that time, TUSI will become the owner of TUC, the regulated water utility operating in the Province of Alberta and will, therefore, be the owner of a “public utility” as defined in the PUB Act.72 As an owner of a public utility, TUSI necessarily becomes a subject of the Board’s regulatory jurisdiction in relation to the various matters addressed in sections 101, 102 and 109 of the PUB Act. However, these sections only apply to public utilities that have been designated for that purpose by Cabinet regulation. The Board expects that, within a reasonable time after the TUC Sale is completed, TUSI will in fact, be designated as a public utility to which sections 101, 102, and 109 of the PUB Act apply through an appropriate amendment to the Designation Regulation. However, the Board recognizes that there will likely be some lag between the date on which the TUC Sale is completed and the date on which TUSI is formally designated as an owner of a public utility. Therefore, the Board will condition its approval of the Application such that TUSI will be deemed to be designated as a public utility for purposes of section 101, 102 and 109 of the PUB Act. ULGI submitted that if the Application is approved by the Board and the Transaction is completed, ULGI will divest itself of all of its interest in matters in which the Board has a regulatory interest. As such, ULGI argued that it would no longer be necessarily subject to sections 101, 102 and 109 of the PUB Act and ULGI requested that the Board recommend its

71 BR-TUSI-1(f) 72 That the owner of sufficient number of shares of a corporation owning the physical assets making up a public

utility is, itself, the owner of a public utility, was established by the Supreme Court of Canada in ATCO Ltd. v. Calgary Power Ltd. [1982] SCR 557.



deletion from the Designation Regulation. The Board considers that this request is reasonable and will recommend that ULGI be deleted from the Designation Regulation. 4.4 Other Matters The Board notes that its approval of the transfer of shares by no means constitutes approval of any underlying costs, changes in service levels, contributions, contractual obligations, affiliate or shared service agreements or arrangements, changes in risk profile or capital structure, debt financing costs or provisions, or any other areas that may give rise to potential harm to TUC customers as a direct or indirect result of the Transaction. The Board expects these issues and others to be fully scrutinized by the Board and customers at TUC’s future initial tariff application or other potential regulatory processes. With respect to other municipal, provincial or federal approvals required before the Transaction can close, ULGI indicated that to its knowledge, the only other approval required was from Alberta Environment regarding the assignment of a License to Operate.73 The Board directs ULGI to advise the Board when the assignment of the License to Operate has been approved. With respect to completion of the Transaction, the Board notes that the Agreement stipulates the closing procedure, the closing date and closing time. The Board directs ULGI to provide notification to the Board after the Transaction has been completed. The Board also directs ULGI to file a final executed copy of the Protocol Agreement with the Board. In addition, the Board directs ULGI to file with the Board, the financial statements of TUC for the period ending on the closing date. The financial statements shall consist of the balance sheet, a statement of income (loss) and retained earnings (deficit) and a statement of changes in financial position. With respect to the Franchise Agreement, the Board notes that TUC confirmed that the Franchise Agreement to which TUC is a party would not be impacted by the TUC Sale and that no action, save and except for the approval by the MD of the release of ULGI from its undertaking, would have to be taken by any party with respect to the Franchise Agreement due to the proposed TUC Sale.74 The Board notes that on July 25, 2005, the MD indicated that it had no objection to the transfer of the Franchise Agreement between ULGI and the MD to TUSI. The Board also notes that following the close of the Transaction, TUSI is planning to retain the names TUC and TWMC. However, within two years of the closing date, as defined in the Agreement, TUSI is obligated to amend the constating documents of TUC and TWMC to change the name of each such entity to a name that does not incorporate the name “Thornmark”.75 The Board directs TUSI to notify the Board with the new name in advance of the change and to ensure that such name change is clearly communicated to customers. The Board supports ULGI’s initiative to have TUSI, TUC and TWMC host a customer evening, after Board approval, to introduce TUSI, and to discuss the transaction and transitional aspects of the sale and to address any customer concerns.76

73 BR-ULGI-7 74 BR-ULGI-8(j) 75 BR-TUSI-7(d) 76 BR-ULGI-10, Letter from ULGI to TUC and TWMC customers dated May 24, 2005



4.5 Future Applications As discussed earlier it has been the Board’s historical practice to approve rates for small water utilities only when customer complaints were unable to be resolved. However, the Board is currently initiating a more proactive form of regulation for these utilities. Consequently, the Board will expect the owner of TUC to make applications to the Board for any proposed changes to rates and terms and conditions of service since TUC is subject to rate regulation by the Board and any proposed changes to rates and terms and conditions of service must be approved by the Board. The Board will deal with such applications as deemed appropriate at the time. In this regard, the Board notes that both ULGI and TUSI have indicated that the TUC records have been maintained in such a way that the Board should readily determine a rate base for TUC according to the terms of the PUB Act.77 TUSI also noted that all accounting records and other files belonging to TUC are to be transferred to TUSI upon the completion of the Transaction. TUSI also noted that it had done extensive due diligence and was comfortable that all records needed to establish a rate base would be available.78

77 BR-ULGI-4 and BR-TUSI-8 78 BR-TUSI-8



5 ORDER

For the foregoing reasons and subject to the conditions set out in this Decision, it is hereby ordered that: (1) Upper Lakes Group Inc. may sell or otherwise transfer to Terasen Utility Services Inc.

100% of its shares of Thornmark Utilities Corporation. (2) Neither Thornmark Utilities Corporation nor Terasen Utility Services Inc., or any of their

successors, shall seek to recover from Thornmark Utilities Corporation customers any premium over net book value paid to Upper Lakes Group Inc. for the shares of Thornmark Utilities Corporation pursuant to the Agreement or any amendments thereto.

(3) Upper Lakes Group Inc. may sell or otherwise transfer to Terasen Utility Services Inc.

100% of its shares of Thornmark Waste Management Corporation. (4) Neither Thornmark Utilities Corporation nor Terasen Utility Services Inc., or any of their

successors, shall seek to recover from Thornmark Utilities Corporation customers any portion of the purchase price for the Thornmark Waste Management Corporation shares pursuant to the Agreement or any amendments thereto.

(5) Pending designation by the Lieutenant Governor in Council pursuant to Sections 101(1)

and 109(1) of the PUB Act, Terasen Utility Services Inc. is deemed to be designated as an owner of a public utility to which sections 101, 102 and 109 of the PUB Act apply.

Dated in Calgary, Alberta on November 2, 2005. ALBERTA ENERGY AND UTILITIES BOARD (original signed by) G. J. Miller Presiding Member (original signed by) B. T. McManus, Q.C. Member (original signed by) T. McGee Member



APPENDIX 1 – PARTIES PARTICIPATING IN THE PROCEEDING

Name of Organization (Abbreviation) Counsel or Representative (APPLICANTS)

Upper Lakes Group Inc. (ULGI) C. Oxtoby H. M. Kay

Terasen Utility Services Inc. (TUSI) A. Fung, Q. C. D. H. Izett

MD of Foothills T. Gilliss

Representing Himself Gregory Chitrenky Alberta Energy and Utilities Board Board Panel G. J. Miller, Presiding Member B. T. McManus, Q.C., Member T. McGee, Member Board Staff A. Domes / S. Wakil (Board Counsel) M. Hagan C. Gromnisky



APPENDIX 2 – 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 Decision, the wording in the main body of the Decision shall prevail.

1. With respect to other municipal, provincial or federal approvals required before the Transaction can close, ULGI indicated that to its knowledge, the only other approval required was from Alberta Environment regarding the assignment of a License to Operate. The Board directs ULGI to advise the Board when the assignment of the License to Operate has been approved.................................................................................................................................. 22

2. With respect to completion of the Transaction, the Board notes that the Agreement stipulates the closing procedure, the closing date and closing time. The Board directs ULGI to provide notification to the Board after the Transaction has been completed. The Board also directs ULGI to file a final executed copy of the Protocol Agreement with the Board. In addition, the Board directs ULGI to file with the Board, the financial statements of TUC for the period ending on the closing date. The financial statements shall consist of the balance sheet, a statement of income (loss) and retained earnings (deficit) and a statement of changes in financial position..................................................................................................................... 22

3. The Board also notes that following the close of the Transaction, TUSI is planning to retain the names TUC and TWMC. However, within two years of the closing date, as defined in the Agreement, TUSI is obligated to amend the constating documents of TUC and TWMC to change the name of each such entity to a name that does not incorporate the name “Thornmark”. The Board directs TUSI to notify the Board with the new name in advance of the change and to ensure that such name change is clearly communicated to customers. ..... 22



APPENDIX 3 – SUMMARY OF BOARD CONDITIONS

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

1. The Board notes that TUSI, on behalf of TUC, does not plan to file for a change in rates following the TUC Sale and, therefore, there is no immediate possibility for any potential premium paid to ULGI to be recovered via customer rates. Nevertheless, while the Board recognizes that utilities involved in most past sale proceedings have not had market based rates, the Board considers it in the public interest, as it has found in previous decisions, to formalize TUSI’s commitment not to seek recovery of any potential premium from customers. Therefore, the Board will condition any approval of the TUC Sale so that any potential premium cannot be recovered from customers........................................................ 12

2. The Board considers that the only conditions required are those prohibiting recovery of any potential premium from customers and, as discussed below in Section 4.3, deeming TUSI to be a designated owner of a public utility for the purposes of sections 101, 102 and 109 of the PUB Act. Therefore, subject to these conditions, the Board has concluded that the TUC Sale will not harm customers and is in the public interest.............................................................. 16

3. As discussed earlier in this Decision, the Board notes that TUSI, on behalf of TUC, does not plan to file for a change in rates following the TUC Sale and while the Board notes that TUSI confirmed that no portion of the purchase price for the TWMC shares would be recovered within charges for water services to TUC’s customers, the Board still considers it in the public interest to formalize such commitment from TUSI. Therefore, the Board will condition any approval of the TWMC Sale so that no portion of the purchase price will be recovered from TUC customers.............................................................................................. 21

4. The Board expects that, within a reasonable time after the TUC Sale is completed, TUSI will in fact, be designated as a public utility to which sections 101, 102, and 109 of the PUB Act apply through an appropriate amendment to the Designation Regulation. However, the Board recognizes that there will likely be some lag between the date on which the TUC Sale is completed and the date on which TUSI is formally designated as an owner of a public utility. Therefore, the Board will condition its approval of the Application such that TUSI will be deemed to be designated as a public utility for purposes of section 101, 102 and 109 of the PUB Act. ................................................................................................................................. 21


Date post:	02-Aug-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

Upper Lakes Group Inc. - AUC...ALBERTA ENERGY AND UTILITIES BOARD Decision 2005-118: Upper Lakes...

Documents