Acquisition by Berkshire Hathaway subsidiary passes no harm test for financial impact on customer rates and service.
In Decision 2014-326, the Alberta Utilities Commission approved the acquisition of Altalink, L.P. by a subsidiary of Berkshire Hathaway Energy (BHE), based upon its established “no harm” test for financial impact on customer rates and service quality. The AUC will continue to regulate AltaLink in exactly the same way as it did before the change in ownership. AltaLink’s rates, its owner’s return on investment, and the assurance of customer service quality and reliability will continue to be set, as always, by the AUC in a fully public process. It is the AUC’s legislated mandate to ensure utility rates are just and reasonable.
There will be no additional costs imposed on customers as a direct result of the share transaction or as a consequence of commitments made to obtain the required federal approval. The AUC approval followed a public review process which offered any interested Albertan the opportunity to make a submission for AUC consideration. The AUC approval of the $3.2 billion share transaction followed that of the federal government under a separate mandate, which described the sale as likely of net benefit to Canada.
The AUC review determined whether the sale would cause financial harm to customers in terms of the rates paid for service or the reliability of the service provided by the regulated utility, AltaLink. This provincial mandate was defined by the scope of the AUC’s enabling legislation, and the courts.
In reaching its approval, the Commission determined that its no harm test had been satisfied in consideration of other aspects important to the overriding concern of potential financial impact on rates and service quality, including:
- The change in ownership will not adversely affect the operation or financing of AltaLink. Credit rating analyses consider the transaction to be neutral or beneficial to the cost of debt required to finance AltaLink transmission assets.
- AltaLink is currently engaged in a large transmission build ongoing in the province. As it raises funds in the market, impacts to its credit rating have a corresponding impact on customer rates. The Commission found the purchase of AltaLink should be a net benefit to ratepayers from a financing perspective.
- The existing management expertise and capability will not be changed and may benefit from the sharing of best practices among the new owners and AltaLink.
- The change in ownership will not affect the credit quality of AltaLink because measures to isolate the financial risks of the owners from Altalink will continue in place ensuring the financial, legal and operational separation of AltaLink. The operational independence of AltaLink will remain unchanged.
The AUC review process was public; all documents and submissions are available on the public record. The AUC approval decision, Decision 2014-326, is also available on the AUC website in the Decisions section. A summary is also available under Items of interest.
Highlights of some elements of the no harm test for financial impact on customer rates or service quality as a direct result of the sale transaction, and other elements, are included as follows. These highlights are provided for the convenience of the reader and are not intended to be comprehensive, nor do they interpret, supplement or substitute for the detailed information or findings in Decision 2014-326.
Impact to rates and charges passed on to Alberta customers
The Commission considered the purchase price to represent the market price for the AltaLink transmission business and assets at the time of the conclusion of the purchase price negotiations.
The purchaser has been unequivocal that it will not seek to recover what has been described as a purchase premium in any manner that would have a direct impact on the future costs included in utility revenue requirement and hence the rates charged to customers.
The Commission considered the suggestions of certain parties that MC Alberta or its owners will seek to recoup the purported premium over net book value through requests for higher than necessary capital additions to AltaLink’s rate base, attempts to increase AltaLink’s regulated revenue requirement, or by reducing the quality of service to be provided, to be speculative.
Furthermore, in this regard, AltaLink’s rate base and revenue requirement remains subject to Commission oversight and regulation. Should the need ever arise, a matter such as this could be addressed in future proceedings, such as tariff applications. As well, the need for all transmission capital additions proposed for the purposes of adding capacity to Alberta’s transmission system is determined by the ISO and subject to the Commission’s regulatory oversight.
Safety, quality and reliability of service
AltaLink remains subject to AUC regulation with respect to reliability and service quality matters through its obligation to adhere to the terms and conditions attached to its tariff.
Additionally, the safety and reliability of AltaLink’s transmission service will continue to be subject to the Alberta Electric System Operator’s (AESO) direction through independent system operator (ISO) rules, reliability standards and operating policies.
Impact of the financial profile for the purpose of attracting needed investment capital
AltaLink is currently engaged in a large transmission build ongoing in the province. As it raises funds in the market, impacts to its credit rating have a corresponding impact on customer rates. The Commission found that the purchase of the AltaLink transmission assets and business from SNC should be of net benefit from a financing perspective because of the financing capacity of the new owner.
The Commission also agreed that the ability to purchase and sell assets, subject to reasonable regulatory oversight by the Commission, is necessary to ensure continued investment in energy transmission, to enable the timely upgrade and expansion of transmission facilities, and to foster a stable investment climate and continued stream of capital investment for Alberta’s transmission system.
Utility’s ability to remain sufficiently separate, financially, legally and operationally
Ring fencing measures are steps taken to isolate the creditworthiness of the operating utility, AltaLink, from its parent owner, whoever that might be. The change in ownership will continue to preserve the financial isolation of AltaLink from its parent entities.
Ability of the Commission to retain sufficient regulatory oversight of the utility
As a regulated utility, AltaLink remains essentially untouched by the sale. The AUC will continue to assess the reasonable and prudent actions of AltaLink as part of its job. The AUC is required to ensure utilities act to provide customers with safe and reliable service, at just and reasonable rates.
Ability of management and operational expertise to remain in place post-acquisition
The share transactions do not result in the introduction of a new operator for the AltaLink transmission business. The AUC will continue as before to regulate the cost and the quality of service of service by AltaLink. The AUC does not micro-manage operational management decisions of AltaLink, but if the continuity of management and operational expertise is not maintained, the Commission can, and will, step in to determine if any costs associated with such a circumstance should be borne by the AltaLink owners, not customers. However, the Commission noted that changes to management or increased operational expertise might also result in increased operational efficiency post-acquisition.
Impact of acquisition transaction costs to customers
Although preparation and advancement of the acquisition applications involved significant time and resources of AltaLink senior executives and other AltaLink staff, these costs should be included as part of the transaction costs for shareholders and not recovered from ratepayers.
Potential for export of electricity or increased power prices
Although there was some public concern for potential exports of electricity from Alberta to the United States, this is not an issue which would occur through the purchase of AltaLink. AltaLink does not buy, sell or own the electricity that is moved through its transmission system. It is a conduit through which market participants purchase and sell electric energy. Nowhere in the operation of a transmission utility such as AltaLink is there an opportunity for the utility to divert energy for export. The planning and development of new transmission infrastructure, whether intended to serve provincial, interprovincial or export markets, is not within the control of any electric transmission utility in Alberta. Additionally, electricity exports are regulated by the National Energy Board and require a permit or a licence under Sections 119.02 – 119.08 of the National Energy Board.
With regard to the actual price of power, although the Commission does not have jurisdiction over electric energy commodity pricing, it does have jurisdiction over pricing of transmission services and the manner in which those services are provided through its legislated core functions of rate setting and the protection of the integrity and dependability of utility infrastructure. The Commission must approve the costs ultimately passed onto ratepayers by AltaLink through the rates charged under its regulated tariff.
Concerns about foreign ownership
The approval of this investment in a Canadian enterprise by a foreign entity falls under federal jurisdiction and is governed by the provisions of the Investment Canada Act. The federal Industry Canada minister approved the application of BHE to acquire control of AltaLink subject to certain commitments, stating, “I am satisfied that your investment is likely to be of net benefit to Canada.”
The Commission’s authority to approve or deny approval of the AltaLink transaction was in the context of its rate-setting and protection of utility-system integrity functions, exercised through the application of its no harm test which considers the impact to customers of the transaction with respect to the rates they pay and the services they receive. These impacts fall within the public interest mandate of the Commission and were the focus of the AUC review. The Commission cannot deny an acquisition simply because the proposed owner is foreign.
Themes of public concern related to public ownership of the assets themselves have been dealt with by the Supreme Court of Canada. The court has made it clear that customers have no property interest or ownership interest in a utility. Customers pay only for regulated services through rates which does not give them any control or ownership of the assets. AltaLink is not publicly owned or funded, it is owned by partners who inject equity or incur debt as required, customers then pay for the costs to provide service.
The divesting party does not wish to be in the Alberta utility business
SNC wishes to divest itself of its indirect investment in AltaLink and MC Alberta and its parent corporation, BHE, wants to become the owner of ALP.
It is difficult to quantify the potential positive and negative benefits attributable to this intangible factor. A supportive owner is a positive attribute. However, a financially constrained owner, no matter how well- intentioned, would not be of benefit to the utility. The Commission, in assessing this factor considered the financial strength of the entity seeking to replace the current owner and weighed this factor against the status quo, which would have left AltaLink in the control of an entity which does not want to be in the transmission business and has recently been the subject of some controversy.
Commitments made to Industry Canada as part of federal government approval
A number of commitments were made to Industry Canada as part of the federal government approval. The Commission agreed with consumer groups that Berkshire Hathaway shareholders, not ratepayers, should be required to bear the costs that are incurred solely to comply with the approval under the Investment Canada Act. The AUC will not approve any costs submitted in the future under these commitments except where they would be prudently incurred to provide service in the absence of Industry Canada conditions.
For example, regardless of any commitment that BHE has made to Industry Canada to maintain staffing levels at AltaLink for a certain period of time, any costs for staffing levels beyond what the Commission has allowed as necessary, that AltaLink may have to incur to fulfill its commitment to Industry Canada, will not be borne by ratepayers.
Similarly, shareholders, and not customers, will fund any commitments to academic programs, cultural organizations and community-based programs within Alberta, even those that BHE has made as part of its commitments to Industry Canada in pursuit of its Investment Canada Act approval. Utility requests for customer funding of charitable donations, including funding to cultural organization and community based programs have been consistently disallowed by the Commission. In a competitive market, companies make decisions about charitable giving through sponsorships on behalf of their shareholders, often recognizing that these contributions will assist the company in achieving certain business objectives. The Commission does not consider that ratepayers should be expected to provide sponsorship or other charitable funding to a utility and, in turn, have the utility decide how or where to distribute the funds on their behalf.
(Source: Province of Alberta on behalf of the Alberta Utilities Commission)