The ATCO Utilities (ATCO Gas and Pipelines Ltd. and ATCO ... · 5.2 KPMG price assessment, Gartner...

Decision 20514-D02-2019

The ATCO Utilities (ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd.)

Information Technology Common Matters Proceeding

June 5, 2019

Alberta Utilities Commission Decision 20514-D02-2019

The ATCO Utilities (ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd.)


Proceeding 20514

June 5, 2019

Published by the:

Alberta Utilities Commission

Eau Claire Tower

1400, 600 Third Avenue S.W.

Calgary, Alberta T2P 0G5

Telephone: 310-4AUC ((310-4282 in Alberta)

1-833-511-4AUC (1-833-511-4282 outside Alberta)

Email: [email protected]

Website: www.auc.ab.ca

The Commission may, within 30 days of the date of this decision and without notice, correct

typographical, spelling and calculation errors and other similar types of errors and post the

corrected decision on its website.

Decision 20514-D02-2019 (June 5, 2019) • i

Contents

1 Decision summary ................................................................................................................. 1

2 Introduction and procedural summary ............................................................................... 1

3 Background ............................................................................................................................ 3

3.1 The regulatory framework.............................................................................................. 3

3.2 IT placeholders and other related regulatory proceedings ............................................. 4

3.3 The ATCO Utilities and IT services .............................................................................. 4

4 Scope of the proceeding and test to be applied ................................................................... 8

5 Does the MSA pricing result in just and reasonable rates? ............................................ 14

5.1 Sourcing strategy and tender/bid process ..................................................................... 15

5.1.1 Commission findings ...................................................................................... 20

5.1.1.1 Consideration of sourcing options ..................................................... 21

5.1.1.2 The tender/bid process ....................................................................... 24

5.2 KPMG price assessment, Gartner benchmark, glide path and COLA analyses .......... 28


5.2.1.1 Lack of transparency .......................................................................... 37

5.2.1.2 Limited to first year pricing; failure to consider the total contract

value ........................................................................................................... 40

5.2.1.3 Failure to consider total transaction volume and inconsistent evidence

on volumes ...................................................................................................... 40

5.2.1.4 Benchmark focuses on the mean and not the lowest price of first

quartile ........................................................................................................... 43

5.2.1.5 Neither the price assessment nor the benchmark refute the possibility

of cross-subsidization...................................................................................... 44

5.2.1.6 Glide path and total contract value analysis ...................................... 44

5.3 .............................................................................................. 47


5.4 10-year term of the MSAs ............................................................................................ 53


5.4.1.1 Ten-year IT contracts were market outliers ....................................... 55

5.4.1.2 No persuasive evidence of avoided risk and cost or of cost savings

achieved .......................................................................................................... 56

5.4.1.3 No compelling evidence of risk mitigation ....................................... 57

5.5 MSA governance provisions ........................................................................................ 58


6 Adjustments to IT MSA service rates ................................................................................ 62

6.1 Commission findings ................................................................................................... 66

6.1.1 Authority for and approach to adjustments ..................................................... 66

6.1.2 Effects of the sourcing strategy and tender/bid process on the MSA pricing . 68

6.1.3 Effect of the on the MSA pricing .................................. 70

6.1.4 How the Gartner benchmark assists in the determination of reasonable

adjustments ..................................................................................................... 71

6.1.5 Effect of glide path and TCV on the MSA pricing ......................................... 72

6.1.6 Conclusion ...................................................................................................... 73

Decision 20514-D02-2019 (June 5, 2019) • ii

7 Rate-setting - Implementation of any adjustment to IT rates for cost-of-service and

distribution utilities ............................................................................................................. 76

8 Order .................................................................................................................................... 79

Appendix 1 – Proceeding participants ...................................................................................... 81

Appendix 2 – Oral hearing – registered appearances ............................................................. 83

Appendix 3 – Finalized issues list .............................................................................................. 84

Appendix 4 – Motions and procedural rulings ........................................................................ 85

Appendix 5 – IT placeholders .................................................................................................... 93

Appendix 6 – Summary of Commission directions .................................................................. 96

List of tables

Table 1. Calgary recommended price and glide path adjustments..................................... 63

Table 2. Gartner benchmark FMV range ............................................................................. 72

Table 3. Proceeding 22011 – IT services charged to operations .......................................... 93

Table 4. Proceeding 23793 – IT services charged to operations .......................................... 94

Table 5. Proceeding 22742 – IT placeholders ........................................................................ 95

Decision 20514-D02-2019 (June 5, 2019) • 1


Calgary, Alberta

The ATCO Utilities

(ATCO Gas and Pipelines Ltd. and

ATCO Electric Ltd.)


Decision 20514-D02-2019

Proceeding 20514

1 Decision summary

In this decision, the Alberta Utilities Commission considers whether to approve the prices

contained in the information technology master services agreements between the ATCO

Utilities1 and Wipro Solutions Canada Limited for inclusion in each of the regulated utilities’revenue requirements.

For the reasons expressed in this decision, the Commission has determined that:

(a) The ATCO Utilities have failed to demonstrate that the information technology

pricing in the master services agreements would result in just and reasonable rates if

included in revenue requirement.

(b) The ATCO Utilities shall only be permitted to recover those information technology

costs that were prudent in the circumstances and will result in just and reasonable

rates. More specifically, in the first year of the master services agreements, 2015,

pricing will be reduced by 13 per cent. In each of years 2 through 10 of the master

services agreements, a glide path that reduces prices on a weighted average basis

across towers by 4.61 per cent will be imposed.

The implementation of any adjustments to IT rates for cost-of-service and distribution utilities is

discussed in Section 7 of this decision.

2 Introduction and procedural summary

On June 4, 2015, the Commission released Bulletin 2015-11,2 which initiated the ATCO

Utilities Information Technology Common Matters Proceeding, to examine prices related to

master services agreements (MSAs) between the ATCO Utilities and Wipro Solutions Canada

Limited for the provision of information technology (IT) services to the ATCO Utilities. This

proceeding was initially established to address IT-related matters raised in both Proceeding 3577,

ATCO Pipelines’ 2015-2016 general rate application, and Proceeding 20272, ATCO Electric

Transmission’s 2015-2017 general tariff application. It was also identified as having future

implications for the regulated distribution utilities, ATCO Gas and ATCO Electric Distribution,

currently subject to performance-based regulation (PBR).

1 ATCO Electric Transmission and ATCO Electric Distribution, divisions of ATCO Electric Ltd.; ATCO Gas and

ATCO Pipelines, divisions of ATCO Gas and Pipelines Ltd. 2 Exhibit 20514-X0027 Bulletin 2015-11, Initiating the ATCO Utilities information technology (IT) common

matters proceeding to examine IT costs related to the master services agreements (MSAs) between the ATCO

Utilities and Wipro Solutions Canada Limited (Wipro), June 4, 2015.

Information Technology Common Matters Proceeding The ATCO Utilities (ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd.)

Decision 20514-D02-2019 (June 5, 2019) • 2

In Bulletin 2015-11, the Commission directed ATCO Pipelines and ATCO Electric

Transmission to file in this proceeding all evidence on the records of proceedings 3577 and

20272 related to IT costs and the subject MSAs. In its ruling of June 8, 2015, the Commission

confirmed that the evidence granted confidential treatment in proceedings 3577 and 20272 would

have the benefit of the same treatment in this proceeding.3

The Commission issued notice of this proceeding on June 5, 20154 and parties who were

participants in proceedings 3577 and 20272 were automatically registered to participate.5

Bulletin 2015-11 contained a preliminary list of issues for consideration in this proceeding.

On June 13, 2015, following submissions from parties,6 the Commission issued a final issues

list,7 a copy of which is in Appendix 3 to this decision.

During the process leading up to the oral hearing, the Commission issued several

procedural and evidentiary rulings in response to requests and motions from the ATCO Utilities

and the intervener parties. Particulars of the motions and rulings are summarized in Appendix 4

to this decision.

The process for this proceeding included four rounds of information requests (IRs) to the

ATCO Utilities, Canadian Utilities Limited (CUL), and ATCO Ltd. and responses from these

parties; intervener evidence filed by the Office of the Utilities Consumer Advocate (UCA)8 and

The City of Calgary (Calgary);9 IRs and responses to IRs on intervener evidence;10 11 and rebuttal

evidence filed on behalf of the ATCO Utilities, CUL, and ATCO Ltd.12

An oral hearing was held in the Commission’s Calgary hearing room from October 15 to

19, and October 22 and 23, 2018. During that time, the Commission held certain sessions of the

oral hearing on a confidential basis, which confined attendance to parties who had signed

confidentiality undertakings.13

3 Exhibit 20514-X0030, Ruling on confidential treatment of information. 4 Exhibit 20514-X0029. 5 All registered parties are listed in Appendix 1 of this decision. However, only the applicant, ATCO Utilities,

and the interveners, The City of Calgary (Calgary), the Consumers’ Coalition of Alberta (CCA) and the Office of the Utilities Consumer Advocate (UCA) were active in this proceeding.

6 Submissions from the ATCO Utilities on the issues list and parties’ submission on the issues list can be found in exhibits 20514-X0044 and 20514-X0050. Submissions from the UCA on the issues list can found in exhibits

20514-X0045 to 20514-X0047. The CCA’s submission can be found in Exhibit 20514-X0049. Finally,

Calgary’s submission and subsequent comments can be found in exhibits 20514-X0048, 20514-X0052 and

20514-X0054. 7 Exhibit 20514-X0056, 2015-08-13 AUC letter - Process schedule and issues list. 8 Exhibits 20514-X0386 to 20514-X0390.01. 9 Calgary initially filed its evidence on July 20, 2018, but then removed the public exhibits pending a ruling from

the Commission on confidentiality. The redacted evidence was later filed on the public record on July 31, 2018,

in exhibits 20514-X0401 to 20514-X0403. 10 Exhibits 20514-X0417 to 20514-X0422. 11 Exhibits 20514-X0423 to 20514-X0434. 12 Exhibits 20514-X0438 to 20514-X0441.01. 13 A request was submitted by the ATCO Utilities on September 24, 2018 (included in the ATCO Utilities’ cover

letter to their rebuttal evidence, filed as Exhibit 20514-X0438) that the oral hearing be entirely confidential. The

Commission denied the request on October 3, 2018 (Exhibit 20514-X0447).


Decision 20514-D02-2019 (June 5, 2019) • 3

The Commission received written public and confidential argument from the ATCO

Utilities,14 Calgary15 and the UCA16 on November 28, 2018. Following an extension request from

the ATCO Utilities,17 which was granted on December 10, 2018,18 public and confidential reply

argument was filed by the ATCO Utilities and the UCA on December 20, 2018,19 and by Calgary

on December 21, 2018.20

The Commission considers the record for Proceeding 20514 to have closed on

December 21, 2018.

Because the Commission is a public body, all documents submitted to the Commission,

as well as its decisions, are publicly available unless otherwise directed. As noted above, the

Commission granted confidential treatment to a portion of the evidence on the record of this

proceeding. This decision reflects the Commission’s findings from all of the evidence and argument on the record of this proceeding, including issues addressed in the confidential portion

of this proceeding and will be issued to parties who have signed confidentiality undertakings in

this proceeding. The publicly available copy of this decision is redacted in accordance with the

Commission’s confidentiality rulings.

In reaching the determinations set out within this decision, the Commission has

considered all relevant materials comprising the record of this proceeding, including the

evidence, argument and reply argument provided by each party. Accordingly, references in this

decision to specific parts of the record are intended to assist the reader in understanding the

Commission’s reasoning relating to a particular matter and should not be taken as an indication that the Commission did not consider all relevant portions of the record with respect to that

matter.

3 Background

A brief review of the factual background to this proceeding is warranted to provide

context for the discussion that follows.

3.1 The regulatory framework The ATCO Utilities were regulated under a rate base rate-of-return methodology, also

referred to as cost-of-service regulation, until 2012. In Decision 2012-237,21 the Commission

approved performance-based regulation (PBR) for Alberta distribution utilities effective

14 Exhibit 20514-X0491 the ATCO Utilities argument. 15 Exhibit 20514-X0492, Calgary argument. 16 Exhibit 20514-X0494, UCA argument. 17 Exhibit 20514-X0495, the ATCO Utilities letter requesting extension of reply argument deadline, December 7,

2018. 18 Exhibit 20514-X0496. 19 The ATCO Utilities’ reply argument is at Exhibit 20514-X0497. The UCA reply argument was initially filed

entirely on the confidential record; the redacted public version was filed on January 8, 2019, as Exhibit 20514-

X0500. 20 Exhibit 20514-X0498. 21 Decision 2012-237: Rate Regulation Initiative Distribution Performance-Based Regulation, Application

1606029-1, Proceeding 566, September 12, 2012.


Decision 20514-D02-2019 (June 5, 2019) • 4

January 1, 2013, for a term of five years. As a result, ATCO Gas and ATCO Electric Distribution

(the distribution utilities) transitioned to PBR.

In Decision 20414-D01-2016 (Errata),22 the Commission approved the next generation of

PBR plans to be implemented for the 2018 to 2022 period.

ATCO Pipelines and ATCO Electric Transmission (the transmission utilities) continue to

operate under cost-of-service regulation.

In light of these different regulatory schemes, the Commission’s determinations apply

differently to the transmission utilities than to the distribution utilities. A detailed discussion on

how adjustments will be applied to the distribution and transmission utilities is found in

Section 7.

3.2 IT placeholders and other related regulatory proceedings A placeholder is created when specific costs for a utility are not finalized because those

costs are contingent upon some other event or proceeding. The IT costs included in the revenue

requirement for those utilities affected by the IT common matters proceeding have been treated

as a placeholder until the MSA prices are determined in this proceeding. The approved IT rates

will be multiplied by utility-specific IT volumes to determine costs that will be approved for

inclusion in revenue requirement in a future rate proceeding. The IT costs for each of the ATCO

Utilities will then be finalized and included in revenue requirement and rates.

The following approved placeholders for IT rates and costs are in place pending the

resolution of this proceeding:

IT rates and costs for ATCO Pipelines for 2015-2016 (Proceeding 3577)

IT rates and costs for ATCO Pipelines for 2017-2018 (Proceeding 22011)

IT rates and costs for ATCO Electric Transmission for 2015-2017 (Proceeding 20272)

IT common costs for ATCO Gas and ATCO Electric Distribution (Proceeding 23355)

A more detailed overview of IT placeholders is provided in Appendix 5 of this decision.

Given that the MSAs between Wipro and the ATCO Utilities are effective from 2015 to

2024, the Commission must also consider how the findings in this decision may affect forecast

IT costs for ongoing and future proceedings, including ATCO Electric Transmission in

Proceeding 22742: ATCO Electric Transmission 2018-2019 General Tariff Application, and

ATCO Pipelines in Proceeding 23793: ATCO Pipelines 2019-2020 General Rate Application.

3.3 The ATCO Utilities and IT services The procurement of IT services for the ATCO Utilities and the associated regulatory

treatment of IT rates and services for those entities has a lengthy and complex history dating

from the late 1990s. That history is succinctly reviewed in Decision 2014-169 (Errata)

22 Decision 20414-D01-2016: 2018-2022 Performance-Based Regulation Plans for Alberta Electric and Gas

Distribution Utilities, Proceeding 20414, December 16, 2016.


Decision 20514-D02-2019 (June 5, 2019) • 5

(Evergreen II decision).23 This decision is concerned only with events starting in 2013, as

summarized below.

Prior to December 31, 2014, the ATCO Utilities obtained IT services from ATCO I-Tek

Inc., an unregulated affiliate company owned by CUL, which also owns the ATCO Utilities.

ATCO Ltd. is the parent of CUL. ATCO Ltd. and CUL are hereafter collectively referred to

throughout this decision as ATCO.24

On or about August 15, 2014, ATCO sold ATCO I-Tek to Wipro for approximately

$204 million. Concurrent with the sale, ATCO contracted with Wipro for IT services25 and

entered into an with Wipro 26 27 Also on

, the ATCO Utilities entered into 10-year MSAs with Wipro for the provision of

IT services commencing .28 A summary of some of the events leading up to and

following the execution of the MSAs with Wipro and the sale of ATCO I-Tek is provided below.

29

(a)

23 Decision 2014-169 (Errata): ATCO Utilities (ATCO Gas, ATCO Pipelines and ATCO Electric Ltd.), 2010

Evergreen Proceeding for Provision of Information Technology and Customer Care and Billing Services Post

2009 (2010 Evergreen Application), Proceeding 240, Application 1605338-1, February 6, 2015, paragraphs 17-

43. 24 In this proceeding, the ATCO Utilities referred to ATCO Ltd. and CUL collectively as ATCO or ATCO Ltd.

(see, for example, Exhibit 20514-X0491CONF, paragraph 1). The Commission refers to ATCO Ltd. and CUL

collectively as ATCO throughout the remainder of this decision for consistency. 25 Both ATCO Ltd. and CUL are an “owner of a public utility” within the meaning of Section l(h) of the Public

Utilities Act. 26 Exhibit 20514-X0375, PDF pages 146-163. 27 Exhibit 20514-X0344-CONF, PDF page 206. 28 Exhibit 20514-X0301.01-CONF. 29 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 20. 30 Mr. Zadko’s testimony at Transcript, Volume 3, page 268: “Project Phoenix was made up of two separate

processes; the sale of I-Tek and the MSA process, and under both we ran competitive tender process under each

workstream.”31 Exhibit 20514-X0301.01-

32 Exhibit 20514-X0439.01, ATCO Utilities rebuttal evidence, paragraph 6. 33 Exhibit 20514-X0110.21-CONF.


Decision 20514-D02-2019 (June 5, 2019) • 6

34

35 Exhibit 20514-X0301.01-CONF.36 Each of the ATCO Utilities signed a separate MSA with Wipro – ATCO Gas and Pipelines’ MSA can be found

in AP-AUC-CONF-2015FEB03-091(d) Attachment, which was provided to all parties that had signed

confidentiality undertakings in Proceeding 3577 and which was included in the record of this proceeding.

ATCO Electric’s MSA can be found at Exhibit 20272-X0003-CONF, which was provided to all parties who

had signed a copy of the confidentiality undertaking in Proceeding 20272 and which was included in the record

of this proceeding. 37 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 107. 38 Exhibits 20514-X0301.01-CONF and 20514-X0268-CONF, PDF page 3 which states:

39 Exhibit 20514-X0301.01-CONF. 40 Exhibit 20514-X0301-CONF, ATCO/CUL-AUC-2017DEC19-CONF-004(a), PDF page 12. 41

Presentations from KPMG on

considerations for the new MSA were filed in Exhibit 20514-X0036-CONF, AP-CAL-CONF-2015FEB03-

014(f) Attachment 2, PDF pages 92-193.

42 Exhibit 20514-X0301-CONF, ATCO/CUL-AUC-2017DEC19-CONF-003(d), PDF page 8, states:


Decision 20514-D02-2019 (June 5, 2019) • 7

43 Exhibit 20514-X0344-CONF, ATCO-UCA-CONF-2017DEC19-006 attachment 14, PDF pages 233-253. 44 Exhibit 20514-X0301.01-CONF. 45 Exhibit 20514-X0301.01-CONF. 46 Exhibit 20514-X0037-CONF, PDF page 4 47 Exhibit 20514-X0221-CONF, PDF page 14. 48 Exhibit 20514-X0098, ATCO Utilities letter to AUC. 49 Exhibit 20514-X0124-CONF. 50 Exhibit 20514-X0440.01, beginning at PDF page 31.


Decision 20514-D02-2019 (June 5, 2019) • 8

4 Scope of the proceeding and test to be applied

The fundamental issue raised by this proceeding is whether the IT service costs under the

MSAs should be approved for inclusion in the ATCO Utilities’ revenue requirements, which are

ultimately recovered from utility customers through rates.

The parties agree that the Commission’s jurisdiction to determine the above issue derives

primarily, but not exclusively, from its legislated mandate to, among other things, ensure just and

reasonable rates.51

The parties also agree that the ATCO Utilities bear the onus of demonstrating the

prudence of their costs and that any changes to rates resulting from the inclusion of the MSA

costs in revenue requirement are just and reasonable.52

However, there are a number of points of disagreement between the parties, including the

scope of this proceeding and in particular, the relevance of the evidence on the sale of ATCO

I-Tek to the discharge of the Commission’s mandate. The parties also do not agree on the propertest to be applied in determining whether the MSA costs should be approved for inclusion in the

ATCO Utilities’ revenue requirements.

The Commission’s determination of the issue before it therefore begins with a consideration of these matters.

Under the subheadings that follow, the submissions of each of the parties on these

matters are summarized, followed by the Commission’s findings. This same organizational

structure has been followed throughout this decision.

Views of the ATCO Utilities The primary mandates of the Commission are to establish just and reasonable rates, and

ensure safety, reliability and integrity of the utility system in Alberta. The Commission must

determine the quantum of costs paid pursuant to the MSAs between the ATCO Utilities and

Wipro for the provision of IT services to be included in revenue requirement and rates.53

The ATCO Utilities are fully entitled to enter into commercial agreements with an

independent, arm’s-length, third party for the acquisition of IT services.54 If the Commission

finds that the ATCO Utilities are paying more than FMV for the required IT services, it can

adjust utility revenue requirements accordingly in order to ensure that only FMV is included in

utility rates for such services. That is the scope of the Commission’s mandate as recognized by the courts and by the Commission itself.55

The disposition of ATCO I-Tek to Wipro is not relevant to the Commission’s mandate of setting just and reasonable rates, and the Commission’s examination of FMV pricing should not

51 The Electric Utilities Act, the Gas Utilities Act and the Public Utilities Act, and regulations thereunder, require

the Commission to ensure that a tariff, rate or toll is “just and reasonable.”52 Electric Utilities Act, Section 121(4). Gas Utilities Act, Section 44(3). 53 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 2. 54 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 5. 55 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 28.


Decision 20514-D02-2019 (June 5, 2019) • 9

be influenced by the circumstances of ATCO I-Tek. This is consistent with the Commission’sstatement in the Evergreen II decision:

The Commission is further concerned in this regard, with numerous references (by both

the ATCO Utilities and Calgary) to the specific circumstances of ATCO I-Tek –especially its size and scope of service offerings. Neither the negotiation process nor the

Commission's examination of fair market value pricing should be influenced by the

circumstances of ATCO I-Tek. This is not a cost of service proceeding for ATCO I-Tek.

The issue is fair market value pricing available in the market for IT and CC&B [customer

care and billing] service providers of all sizes based on volumes and types of services

required by the ATCO Utilities.56

The ATCO Utilities submit that when determining amounts to be approved for inclusion

in revenue requirement, the appropriate and only test to be applied is whether the services are

priced at FMV.57 The FMV test has been consistently applied by the Commission in the

fulfillment of its legislative mandate with respect to amounts included in approved revenue

requirement in every proceeding since ATCO decided to outsource the provision of IT services

to an affiliate service provider, ATCO I-Tek, in 1999.58

Pursuant to ATCO’s Inter-Affiliate Code of Conduct (the code), the test for a utility

acquiring for-profit affiliate services is that the utility shall pay no more than the FMV of such

services. FMV is defined in Section 2.1(n) of the code to mean the price reached in an open and

unrestricted market between informed and prudent parties, acting at arm’s-length and under no

compulsion to act. In determining FMV, there should be no cross-subsidization between ATCO’s regulated and unregulated entities, consistent with the definition of FMV that has been applied

and approved by the Commission in past regulatory proceedings.

Although the commercial agreements with Wipro are not affiliate transactions, the code

nevertheless provides guidance. Because FMV is the test to be applied to affiliate relationships, it

can also reasonably be applied to an arm’s-length, third-party non-affiliate transaction, such as

the transaction with Wipro. Moreover, in the ATCO Utilities’ submission, Calgary and its

consultants appear to agree that FMV is the test as they have acknowledged that FMV is

determined by a “true contract based comparison.”59

Lastly, concerning the UCA’s suggestion that the Commission consider not only FMV,

but also the least cost alternative, the ATCO Utilities maintain that any examination of a least

cost alternative must clearly involve the provision of services that meet the ATCO Utilities’ IT requirements and should not involve cross-subsidization, either by the ATCO Utilities or by

ATCO and its unregulated entities. The evidence confirms that the ATCO Utilities chose the

least cost alternative that met their requirements and did not involve cross-subsidization.60

56 Decision 2014-169 (Errata), paragraph 434. Exhibit 20514-X0491-CONF, ATCO Utilities argument,

paragraph 7. 57 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 18. 58 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 38. 59 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 55. 60 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 168.


Decision 20514-D02-2019 (June 5, 2019) • 10

Views of Calgary The Commission must ensure that rates paid by customers are just and reasonable.61

Calgary does not agree that the scope of this proceeding is limited to a narrow FMV examination

of the MSAs using only benchmarks. To the contrary, in the final issues list, the Commission

stated the following:

34. The Commission’s primary mandates are to ensure just and reasonable rates, andthe safety and integrity of the utility system in Alberta. However the Commission is not

prepared to limit the examination of IT services and rates to the narrow FMV assessment

asserted by the ATCO Utilities.

35. The Commission considers that many, if not all, of the additional issues

submitted for inclusion on the issues list by the UCA and Calgary are potentially relevant

to its inquiries in Proceeding 20514. Therefore, it has amended the preliminary list in the

manner reflected in Appendix A to this decision to include them. In doing so, the

Commission cautions participants that inclusion of a particular item on the issues list is

not to be construed as any indication of the weight that may be assigned to associated

evidence by the Commission in its ultimate assessment of the prudence of costs arising

from the Wipro IT MSAs. Questions of weight will be determined in the normal course

after consideration of argument based on the record of the proceeding.62

The additional issues included in the final issues list featured a prudence inquiry and

rejected the narrow FMV assessment asserted by the ATCO Utilities. Consequently, the

prudence of IT costs incurred, the ATCO Utilities’ onus to demonstrate the prudence of their

actions, and the resultant incurred costs are central to ensuring that IT rates are just and

reasonable.63

Calgary disputes the ATCO Utilities’ assertion that its consultants, PA Consulting (PAC),

agreed that FMV is the test for determining the amounts to be included in revenue requirement.

Rather, during cross-examination, PAC acknowledged that the definition of FMV, as used in the

code, is the definition that the ATCO Utilities used for their purposes.64 Further, it should be

observed that the code provides a number of tools to assess FMV, including competitive bids.65

Views of the UCA The Commission’s role is to ensure that customers are not harmed by paying rates that

are not just and reasonable,66 and the Commission “must be particularly careful to ensure that the utility is held to meet its onus where, as here, there is an element of self-dealing in an

outsourcing arrangement, where customers are particularly at risk of being taken advantage of.”67

Nothing in law prohibits the Commission from examining any evidence that is relevant to

its rate-setting jurisdiction, including the sale of ATCO I-Tek.68

61 Exhibit 20514-X0492, Calgary argument, paragraph 38. 62 Exhibit 20514-X0056, AUC letter – Process schedule and issues list.63 Exhibit 20514-X0498, Calgary reply argument, paragraph 52. 64 Exhibit 20514-X0498, Calgary reply argument, paragraph 119. 65 Exhibit 20514-X0492-CONF, Calgary argument, paragraph 24. 66 Exhibit 20514-X0494, UCA argument, paragraph 18. 67 Exhibit 20514-X0494, UCA argument, paragraph 21. 68 Exhibit 20514-X0500, UCA reply argument, paragraph 18.


Decision 20514-D02-2019 (June 5, 2019) • 11

The quotation cited by the ATCO Utilities from the Evergreen II decision (reproduced at

paragraph 34 above) is taken out of context. The quoted text stands for the proposition that a

FMV assessment must consider the entire market of potential providers to determine whether

FMV is achieved, even when that provider is an affiliate with special circumstances.69

The ATCO Utilities routinely conflate the Stores Block70 finding that the Commission’s jurisdiction must either be expressly stated or necessarily implied as limiting the scope of the

evidence the Commission may review when exercising its rate-setting function.

Furthermore, the Supreme Court of Canada held that the Commission is limited in what it

can review only after the Commission finds that a transaction did not harm customers. No such

finding (of no harm to customers) has been made here. The Supreme Court of Canada was also

clear that even after a finding of no harm, the Commission retains a broad ability to protect the

public interest when setting rates.

No party in this proceeding is suggesting that the Commission should confiscate the

unregulated proceeds from the sale of ATCO I-Tek. Rather, the interveners suggest that the

Commission exercise its rate setting function in accordance with the public interest. This

function requires consideration of the entire context of the linked transactions in this proceeding

to ensure that the rates the ATCO Utilities seek to charge are just and reasonable.71

Although the transactions with Wipro are not affiliate transactions, they have the same

characteristics, concerns and risks. As a result the same principles should apply in determining

the amounts to be included in revenue requirement.72 Furthermore, the Evergreen II decision

shows that the Commission has previously considered the least cost alternative, no-harm, and

prudence tests, to ensure customers were paying rates that are just and reasonable in the context

of IT services.73 The different tests are necessary to protect customers’ interests given the significant latitude afforded to utilities to structure their operations to benefit shareholders.74

The analysis of the least cost alternative is two-fold:

First, did the ATCO Utilities select the sourcing option that was the least cost option

that would allow them to provide safe and reliable utility service (including considering

whether the ATCO Utilities could provide some or all of the service themselves)?

Second, if the least cost sourcing option was chosen, did the ATCO Utilities select the

lowest cost provider that would allow them to provide safe and reliable service?75

The Commission must be diligent to ensure that the least cost alternative has been

selected where a utility negotiates a substantial contract that: (i) reflects a major change in

operations; (ii) will have lasting, material effects on utility rates; (iii) could have been substituted

69 Exhibit 20514-X0500, UCA reply argument, paragraph 15. 70 ATCO Gas & Pipelines Ltd. v. Alberta (Energy & Utilities Board), [2006] 1 SCR 140, 2006 SCC 4 [Stores

Block]. 71 Exhibit 20514-X0500-CONF, UCA reply argument, paragraphs 18-20. 72 Exhibit 20514-X0494, UCA argument, paragraphs 22-23. 73 Exhibit 20514-X0494, UCA argument, paragraphs 30-31. 74 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph 23. 75 Exhibit 20514-X0494, UCA argument, paragraph 36.


Decision 20514-D02-2019 (June 5, 2019) • 12

through a number of alternatives; and (iv) is negotiated in circumstances that place customers at

considerable risk of cross-subsidy to the utility’s shareholder.76

Commission findings Scope of the proceeding

The Commission agrees that the decision to outsource the provision of IT services, the

type of outsourcing arrangement by which to acquire those services and from whom, are all

decisions for the ATCO Utilities, or for ATCO on behalf of the ATCO Utilities. The

Commission also agrees that the decision of ATCO to sell the unregulated entity, ATCO I-Tek,

to Wipro, was a decision for ATCO. However, for three principal reasons the Commission does

not agree that the evidence relating to these matters is irrelevant to its consideration of the issue

before it and therefore beyond the scope of this proceeding.

It is squarely within the Commission’s mandate to consider whether the corporate

decisions made by ATCO on the procurement of IT services result in just and reasonable rates

for the ATCO Utilities’ customers. This is consistent with the Commission’s predecessor’s view, expressed in the decision approving the code, that “the regulated utility must address the reasonableness of any and all transactions which impact rates, whether they are with an affiliate

or a third party.”77

Further, as a consequence of the evidence and the arguments advanced by the ATCO

Utilities in this proceeding, and the sourcing strategy developed and executed for the

procurement of IT services, matters concerning the MSAs and the ATCO I-Tek sale processes

are directly relevant to the issue before the Commission.

As noted in their argument and reply, the ATCO Utilities have provided information on

the record of this proceeding in an effort to demonstrate the prudence of the decision to

outsource and of the outsourcing strategy chosen. The ATCO Utilities also expressly rely, in

part, on the MSA tendering and bid processes in support of the contention that MSA pricing was

determined through a competitive process that resulted in FMV.78 The prudence of the ATCO

Utilities’ actions (or of those taken by ATCO on behalf of the ATCO Utilities), and whether the

resulting costs for IT services are just and reasonable are central to the issue to be determined in

this proceeding. All evidence relevant to these matters is therefore in scope and properly

considered by the Commission; not only the evidence that the ATCO Utilities have profiled in

support of their position.

Lastly, the strategy developed and executed by ATCO for the sale of ATCO I-Tek and by

ATCO and the ATCO Utilities for the procurement of IT services, was the outsourcing of IT

services to a third-party provider that would also purchase ATCO I-Tek. The processes

associated with these two transactions were run and concluded concurrently and, according to the

ATCO Utilities, were completed with three objectives in mind: to minimize transition risks and

costs, to ensure IT services would be acquired at FMV, and to maximize the value received upon

76 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph 29.77 Decision 2003-040: ATCO Group Affiliate Transactions and Code of Conduct Proceeding Part B: Code of

Conduct, Proceeding 5823, Application 1237673-1, May 22, 2003, page 15. 78 Exhibit 20514-X0491-CONF, the ATCO Utilities argument, paragraphs 107-108, and Exhibit 20514-X0497-

CONF, the ATCO Utilities reply argument, paragraph 45.


Decision 20514-D02-2019 (June 5, 2019) • 13

the disposition of ATCO I-Tek.79 The first two objectives were identified as being shared by

ATCO and the ATCO Utilities and the third objective was identified as being reflective of

ATCO’s corporate responsibility and obligation to its shareholders.80

As acknowledged by the ATCO Utilities in evidence and argument, the above described

sourcing strategy created the potential for cross-subsidization, that is for the pricing of IT

services under the MSAs to be improperly influenced (made unfair or unreasonable) by the sale

of the unregulated entity. As further acknowledged by the ATCO Utilities, this is “a critical

matter” for the Commission to take into account:81

[144] … any alteration in the sales price for I-Tek, either up or down, which resulted in a

change in MSA pricing, such that this pricing was no longer reflective of Fair Market

Value, would have constituted cross-subsidization one way or the other. This was not

acceptable to ATCO and, likewise, should not be acceptable to the Commission.82

Evidence of any possible influence the sale of ATCO I-Tek may have had on the MSA

pricing is therefore directly relevant to whether that pricing is just and reasonable and properly


The extract from paragraph 434 of the Evergreen II decision does not support a contrary

conclusion, as asserted by the ATCO Utilities. The Commission agrees with the UCA that the

quoted extract has been taken out of context and essentially states that in determining whether

fair market pricing has been achieved, the Commission must consider the entire market of

potential providers, not only the circumstances of a single provider. The quoted extract does not

support the proposition asserted by the ATCO Utilities that:83

… the commercial transaction whereby ATCO disposed of this unregulated subsidiary to

Wipro, the current service provider, should have no bearing upon the manner in which

the Commission fulfills its legislative mandate to set just and reasonable rates and

determine the amounts to be included in utility revenue requirement for the provision of

required IT services.

The test to be applied

All parties agree that the Commission is mandated to ensure, and the ATCO Utilities bear

the onus of demonstrating, that the inclusion of the MSA costs in revenue requirement results in

just and reasonable rates. That is the ultimate test that must be satisfied, failing which the ATCO

Utilities are at risk of a disallowance.

The ATCO Utilities assert that FMV is the only test or means by which the Commission

satisfies this mandate arguing that “the test for utility ratemaking purposes is and has always been, Fair Market Value.”84 The Commission disagrees. FMV is but one criterion that may be

considered; the Commission is not required to equate FMV with just and reasonable rates, nor is

it restricted to considering only FMV in the determination of just and reasonable rates.

79 Exhibit 20514-X0497-CONF, the ATCO Utilities reply argument, paragraphs 2 and 176. 80 Exhibit 20514-X0491, the ATCO Utilities argument, paragraphs 144, 178-182. 81 Exhibit 20514-X0497, the ATCO Utilities reply argument, paragraph 17. 82 Exhibit 20514-X0491, the ATCO Utilities argument, paragraph 144. 83 Exhibit 20514-X0491, the ATCO Utilities argument, paragraph 8. 84 Exhibit 20514-X0491, the ATCO Utilities argument, paragraph 190.


Decision 20514-D02-2019 (June 5, 2019) • 14

There is no singular approach to the determination of just and reasonable rates. Rather, as

was acknowledged by all parties in their submissions, in the context of examining the inclusion

of costs for IT services in revenue requirement, the Commission has historically considered and

employed a number of different tests, including reasonability and prudence; no harm; least cost

alternative; and FMV. Indeed, the code, which both the ATCO Utilities and the UCA argued is

“instructive in terms of the appropriate test to use regarding the pricing of required IT services”85

was developed with all of the above noted tests in mind.

In Decision 2003-04086 in which the Alberta Energy and Utilities Board established the

code, the Commission’s predecessor stated:

The Board has previously noted its view that it is appropriate for affiliate transactions to

occur in situations where customers are not harmed by those transactions, and moreover,

where the choice of purchasing goods or services from the affiliate is prudent. In order

that customers are not harmed by affiliate transactions, it is necessary to ensure that these

transactions occur at a reasonable price, that the reasonableness of that price can be

clearly determined, and that the price paid is less than what it would have cost for the

utility to either provide the goods or services itself or have them procured from a third

party, all else being equal.

Likewise, in the Evergreen II decision, the Commission considered the code, FMV, as

well as the prudence, no-harm and the least cost alternative tests, noting:

There is considerable doubt that the affiliate transaction with ATCO I-Tek is the least

cost sourcing option for IT and CC&B services and that the underlying assumptions of

the business case and prudence review of continuing the for-profit affiliate services

arrangement is consistent with a utility acting prudently and in the best interests of the

ATCO Utilities or their customers. The Code of Conduct says when a utility acquires for-

profit affiliate service, it shall pay no more than fair market value (fair market value

effectively being a ceiling). Based on the above, the Commission finds that the ATCO

Utilities have failed to meet the requirements of Section 4.1 of the Code, the prudence

test articulated by the board in Decision 2002-069,[87] and the no harm criteria outlined in

Decision 2003-040.88

The Commission remains of the view that the effective performance of its mandate to

ensure just and reasonable rates is best achieved through consideration of any or all of the tests

noted above, as warranted by the circumstances before it.

5 Does the MSA pricing result in just and reasonable rates?

The ATCO Utilities assert that the inclusion of the MSA costs in revenue requirement

results in just and reasonable rates because these costs are at FMV as established or

demonstrated by: (i) the IT services sourcing strategy and competitive tender/bid process

85 Exhibit 20514-X0439, ATCO Utilities rebuttal evidence, paragraph 136, quoted at paragraph 24 of

Exhibit 20514-X0494, UCA argument. 86 Decision 2003-040, page 75. 87 Decision 2002-069: ATCO Group, Affiliate Transactions and Code of Conduct Proceeding Part A: Asset

Transfer, Outsourcing Arrangements, and GRA Issues, Application 1237673, July 26, 2002. 88 Decision 2014-169 (Errata), paragraph 259.


Decision 20514-D02-2019 (June 5, 2019) • 15

implemented by ATCO and the ATCO Utilities; and (ii) the price assessment performed by

KPMG, as well as the Gartner benchmark and glide path analyses.89

Sections 5.1 and 5.2 are organized to correspond with the specific grounds relied upon by

the ATCO Utilities, as described in the paragraph above. Sections 5.3, 5.4 and 5.5 address other

arguments advanced by the parties concerning whether the MSA costs are at FMV, meet the least

cost alternative, no-harm and prudence tests, and would result in just and reasonable rates if


While the arguments advanced by the parties were, in some instances, common to more

than one issue, to avoid unnecessary repetition, the arguments have been summarized only once

in the section to which they appeared to have the greatest application. However, in making its

findings throughout this decision, the Commission has had regard for all arguments advanced in

relation to a particular issue.

5.1 Sourcing strategy and tender/bid process Views of the ATCO Utilities

As noted above, the ATCO Utilities stated that it is ATCO’s right to determine whether it would remain in the IT business or divest itself of ATCO I-Tek and acquire IT services from a

third party. In developing and executing the sourcing strategy, ATCO considered repatriation,

multi-sourcing, and outsourcing options to meet the requirements of the ATCO Utilities.

Repatriation, multi-sourcing and outsourcing to a party that did not also purchase ATCO I-Tek

were rejected on the basis of additional risk and cost.90 91

The decision to embark on a full IT outsourcing agreement with a single, large global

vendor provided several advantages:

a simplified environment with fewer vendors allows for more efficient vendor

management and governance;

the provision of access to innovation; allowing one party to manage and make the

investment is a simpler and more realistic model; and

92

89 Exhibit 20514-X0440, Gartner rebuttal evidence, PDF page 9. Gartner explained that

90 Exhibit 20514-X0491-CONF, the ATCO Utilities argument, paragraphs 66 and 76. 91 Transcript, Volume 2, pages 231-232. 92 Exhibit 20514-X0439-CONF, paragraph 54.


Decision 20514-D02-2019 (June 5, 2019) • 16

In addition, a new IT service provider that was also the purchaser of ATCO I-Tek would

ensure that the people and processes continued seamlessly with no additional transition costs to

ATCO, its subsidiaries, and their customers.93

The Commission should reject interveners’ attempts to translate non-binding bids made

during the competitive tender process into a basis for a regulatory decision.99 The reliance by

PAC and Calgary on non-binding bids as a basis for a suggested course of conduct by the

Commission is entirely misleading and inappropriate.

93 Exhibit 20514-X0439-CONF, Rebuttal evidence of ATCO Utilities, paragraph 8. 94 Exhibit 20514-X0491-CONF, the ATCO Utilities argument, paragraph 142. 95 Exhibit 20514-X0491-CONF, the ATCO Utilities argument, paragraph 118. 96 Exhibit 20514-X0439-CONF, the ATCO Utilities’ rebuttal evidence paragraphs 83-84.97 One of the parties was not engaged following its refusal to execute a non-disclosure agreement. 98 Exhibit 20514-X0439-CONF, the ATCO Utilities rebuttal evidence, paragraph 105. 99 Exhibit 20514-X0491-CONF, the ATCO Utilities argument, paragraph 129. 100 Exhibit 20514-X0497, ATCO Utilities reply argument, paragraph 109.101 Exhibit 20514-X0375-CONF, ATCO-CAL-CONF-2018JUN05-016(l).


Decision 20514-D02-2019 (June 5, 2019) • 17

Views of Calgary From a sourcing perspective, ATCO did not act prudently, resulting in MSAs for the

ATCO Utilities that are above FMV.

ATCO’s primary goal was to maximize the purchase price for the sale of ATCO I-Tek;

pricing for IT services was a secondary consideration. This view was supported by the following

statements from ATCO:

and

The evidence of Mr. Edeson of PAC supports the view that customers were harmed by

ATCO’s sourcing strategy:

ATCO pursued a sourcing strategy that was intrinsically tied to the sale of the I-TEK

business, limiting market options to those IT outsourcers both able and interested in

acquiring I-TEK. The result was a constrained evaluation. It did not provide or open

consideration to a full set of market options that would provide the services and pricing

that ATCO and their customers required.103

Further, a review of ATCO’s successive decisions supports the finding that ATCO placed

corporate interests above the interests of utility customers:

the decision not to conduct a market scan of available sourcing options and potential

MSA price outcomes;

the decision to go with a tied deal in lieu of external multi-sourcing or outsourcing;

and

the decision not to engage in a price assessment or sourcing price benchmark “untilthe 11th hour

102 Exhibit 20514-X0344-CONF, ATCO-UCA-CONF2017DEC19-006, PDF page 152.103 Exhibit 20514-X0402-CONF, Direct evidence of Gregg Edeson, PDF pages 4-5.104 Exhibit 20514-X0402-CONF, Direct evidence of Gregg Edeson, PDF page 5.105 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 214.


Decision 20514-D02-2019 (June 5, 2019) • 18

As a result, the MSA rates are higher than FMV and customers have

been adversely affected by the process.106

Given that ATCO made a corporate decision to exit the IT industry, it would have been

prudent for ATCO to assess the option of insourcing.

As a result of the bid requirements of ATCO, the competitive process for the provision of

IT services was not an “open and unrestricted” process but instead one that resulted in IT MSA rates above FMV. The bid process conducted by ATCO was “off-market” and deficient in a number of areas.109 PAC stated that the most competitive pricing for an outsourcing contract can

be attained through the healthy competition enabled by a set of bidders.110

resulting in reduced

competition for the IT services.111

is in alignment with the provisions of the

code.

reduced the ability of the utilities to influence any meaningful MSA price

106 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 191-192.107 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 202.108 Exhibit 20514-X0403-CONF, PAC Report, PDF page 54.109 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 51 and 216.110 Exhibit 20514-X0403-CONF, PAC Report, PDF page 29.111 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 218.112 Exhibit 20514-X0403-CONF, PAC Report, Section 4.4.9 heading, PDF page 39.113 Exhibit 20514-X0492 CONF, Calgary final argument, paragraph 59.114 Exhibit 20514-X0344-CONF, ATCO-UCA-CONF-2017DEC19-006 Attachment, PDF page 45.


Decision 20514-D02-2019 (June 5, 2019) • 19

reductions.115

Calgary stated:

In Calgary’s view the assessment of whether the ATCO Utilities negotiated prudently with Wipro has to be considered in the proper context. That is, that by the time MSA

negotiations began involving the Utilities,

As a result of the tied-deal and joint sale/MSA bidding process determined by ATCO, the

ATCO Utilities were prevented from carrying out a proper IT sourcing process. Further, the

ATCO Utilities had no part in the IT sourcing decisions “and were hamstrung in final MSA negotiations”119 because of prior corporate sourcing decisions. As a result, meaningful steps to

ensure IT costs were prudently incurred and customer interests protected did not occur.

The competitive process established by ATCO for the provision of IT

services was not an “open and unrestricted” process, and did not result in IT rates at FMV.

Views of the UCA The ATCO Utilities’ sourcing strategy did not adequately address why they did not

pursue repatriation or multi-sourcing as was previously done in the Evergreen II proceeding.120

While the UCA accepted “that prudence does not necessarily require extensively considering every potential angle before making a decision,” it submitted “in this case there is no documentation to support that any angle other than selling I-Tek and executing MSAs was given

serious thought.”121 Further, the ATCO Utilities did not test the market to determine if they could

get a better deal without contracting with ATCO I-Tek’s purchaser, or whether repatriation of some or all of the IT function could have achieved cost savings.

115 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 249.116 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 157.117 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 225.118 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 248.119 Exhibit 20514-X0498-CONF, Calgary reply argument, paragraph 55.120 Exhibit 20514-X0494-CONF, UCA argument, paragraph 87.121 Exhibit 20514-X0494-CONF, UCA argument, paragraph 94.


Decision 20514-D02-2019 (June 5, 2019) • 20

This transaction structure traded off shareholder value with ratepayer benefits.

MSA pricing was therefore influenced by

transaction structure, and an examination of the broader transactions structure is relevant to

ensuring customers are not harmed.129 As a result, the ATCO Utilities have not discharged their

burden to justify their applied-for IT costs.

The ATCO Utilities failed to demonstrate that the subject MSAs reflect the least cost

alternative for customers.130 The UCA argued that tying the sale of ATCO I-Tek with the

execution of the MSAs resulted in MSAs that were not at FMV.131

5.1.1 Commission findings The ATCO Utilities asserted that their IT service sourcing strategy was prudent, resulted

in MSA rates that are at FMV and that therefore, inclusion of the MSA rates in revenue

requirement is just and reasonable. The ATCO Utilities argued, in summary, that these

conclusions are supported by evidence that:

(a) A measured, deliberate approach was taken to the consideration of sourcing options

having regard to the objectives of minimizing disruption, mitigating transition risk and

cost, while maximizing negotiating power and cost certainty; and

122 Exhibit 20514-X0390.01-CONF, R. Bell evidence at A. 13.123 Transcript, Volume 1-CONF, page 176, line 5 to page 177, line 13.124 Transcript, Volume 6-CONF, page 996, lines 3-11.125 Exhibit 20514-X0494-CONF, UCA argument, paragraph 96.126 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 29.127 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph 54.128 Exhibit 20514-X0268.17-CONF, Senior Leadership Team Meeting, page 1. 129 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph 60.130 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph 32.131 Exhibit 20514-X0494-CONF, UCA argument, paragraphs 95-97.


Decision 20514-D02-2019 (June 5, 2019) • 21

(b) The competitive tender/bid process was supported by external consultants,

For the reasons set out in the following sections, the ATCO Utilities have failed to

demonstrate that their IT services sourcing strategy was prudent. They have likewise failed to

satisfy the Commission that it can be reasonably concluded from the sourcing strategy or the

tender/bid process employed, that the resulting MSA prices are at FMV, meet the least cost

alternative and no-harm tests, and would result in just and reasonable rates if included in revenue

requirement.

5.1.1.1 Consideration of sourcing options The Commission agrees that it is ATCO’s right to determine whether it will remain in the

IT business. The Commission further recognizes that whether the ATCO Utilities, or ATCO on

their behalf, chose to repatriate, multi-source or outsource IT services, each option would have a

unique cost structure and risk profile. However, the Commission’s mandate is to ensure that

whichever option is chosen, the ATCO Utilities’ costs are prudent and their customers are not paying more than is just and reasonable. The ATCO Utilities bear the onus of establishing both

of these things.

The Commission’s test for prudence is described below. However, generally speaking, to

demonstrate the prudence of their sourcing strategy, the ATCO Utilities must show, among other

things, that adequate consideration was given to the options. The Commission agrees with the

UCA that prudence does not necessarily require extensive consideration of every potential option

before making a decision. However, it is incumbent upon the utility to give reasonable

consideration to the alternatives available to it and to document the basis for its decision-making

so that the Commission has a view into the mechanics of the process and any potential effect on

rates.

In order to satisfy the Commission that customers will not pay more than is just and

reasonable for the outsourced services, the ATCO Utilities must also demonstrate that the MSA

pricing is reasonable, that its reasonableness can clearly be determined, and that the price paid is

associated with the least cost option that meets the needs of the ATCO Utilities.

For the reasons that follow, the Commission finds that neither reasonable consideration

of the options nor documentation of the decision-making process occurred, and therefore, that

the prudence of the sourcing strategy has not been established. For the same reasons, the

Commission cannot come to any reasoned conclusion about whether the chosen sourcing

strategy was the least cost option that meets the needs of the ATCO Utilities and resulted in costs

that are prudent, just and reasonable.

While the ATCO Utilities asserted that a thorough examination of the pros and cons of a

variety of sourcing options, including renewal with ATCO I-Tek, repatriation, joint venture and

multi-sourcing132 was undertaken, no meaningful documentation of this process occurred. Neither

132 Exhibit 20514-X0439-CONF, ATCO Utilities rebuttal evidence, paragraphs 36-55.


Decision 20514-D02-2019 (June 5, 2019) • 22

ATCO nor the ATCO Utilities developed business cases, nor were they able to provide a detailed

quantitative or qualitative assessment of the alternatives.

While the ATCO Utilities asserted that each of the rejected sourcing options was

associated with significant risk, additional up-front and long-term costs and cost uncertainty,

evidence supporting these assertions was also lacking.

However, the KPMG estimate of transition costs was provided for the first time during

the oral hearing, and in response to questions, Mr. Klawitter of KPMG confirmed that it did not

perform any analysis to quantify or confirm its estimate of the transition costs associated with

outsourcing to a third party that did not purchase ATCO I-Tek.136 Mr. Hendsbee, also a witness

for the ATCO Utilities, testified that to his knowledge, no other third party was engaged by

ATCO or the ATCO Utilities to provide an assessment of the transition risks and costs that

would have occurred had the ATCO Utilities transitioned to a service provider that did not also

take over the operations of ATCO I-Tek.137 Mr. Zadko confirmed that neither ATCO nor the

ATCO Utilities conducted their own analysis or assessment to quantify the risks and costs

associated with this option. Rather, Mr. Zadko stated that they relied on their own internal

experience and specifically, on the experience of the project team to know what those costs and

risks would be.138 When questioned by the Commission about his own experience and that of the

other members of the project team with transitions of a size comparable to that which is the

subject of this proceeding, Mr. Zadko stated:

A. MR. ZADKO: Yeah, I can't speak to their experience, whether they had past

experience.

Q. And do you -- you personally, did you have –A. Me personally was not involved in a transition of the magnitude of IT outsourcing of

the magnitude of ATCO, no.139

133 Transcript, Volume 5-CONF, pages 839-840.134 Transcript, Volume 5-CONF, page 836.135 Transcript, Volume 5-CONF, page 841.136 Transcript, Volume 2, page 231.137 Transcript, Volume 4, page 368, lines 16-21.138 Transcript, Volume 4, page 369.139 Transcript, Volume 4, pages 398-399.


Decision 20514-D02-2019 (June 5, 2019) • 23

Considering the evidence of Mr. Nicolaou, who the Commission found to be a very

credible witness, and the limited nature of the evidence presented by the ATCO Utilities on this

issue, the Commission concludes that ATCO’s examination of its sourcing options and particularly, the option to outsource to a provider that was not also required to purchase ATCO

I-Tek, was cursory in nature.

In Decision 2001-110,143 the Commission laid out its test for prudence (and the factors it

is required to consider in assessing it), which was upheld by the Alberta Court of Appeal:144

In summary, a utility will be found prudent if it exercises good judgment and makes

decisions which are reasonable at the time they are made, based on information the owner

of the utility knew or ought to have known at the time the decision was made. In making

decisions, a utility must take into account the best interests of its customers, while still

being entitled to a fair return.

Given the paucity of and deficiencies in the evidence of the ATCO Utilities, as described

above, the Commission has no reasonable basis upon which to conclude that an adequate

consideration of the alternatives occurred, good judgment was exercised, or that a prudent

sourcing decision was made.

The Commission likewise has no ability to compare the potential price outcomes

associated with the various sourcing options available and consequently cannot come to any

reasoned conclusion about whether the chosen option represents the least cost alternative that

meets the needs of the ATCO Utilities; or, alternatively, is one that results in harm to customers.

For all of the above reasons, the evidence of the ATCO Utilities has failed to demonstrate

the prudence of the ultimate sourcing decision, that the best interests of customers were taken

into account in making that decision, or that in the end result, customers would be required to

pay no more than is just and reasonable.

140 Transcript, Volume 6-CONF, page 1054.141 Transcript, Volume 6-CONF, page 1033.142 Transcript, Volume 6-CONF, page 1054.143 Decision 2001-110: Methodology for Managing Gas Supply Portfolios and Determining Gas Cost Recovery

Rates Proceeding and Gas Rate Unbundling Proceeding, Part B-1: Deferred Gas Account Reconciliation for

ATCO Gas, Proceeding 5809, Application 1237658-2, December 12, 2001. 144 See ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board) 2005 ABCA 122 at page 14.


Decision 20514-D02-2019 (June 5, 2019) • 24

5.1.1.2 The tender/bid process In approving revenue requirement amounts that would flow out of a typical outsourcing

contract, among other things, the Commission generally seeks to confirm the competitive nature

of the process; consider the rationale for selecting the chosen contract; and confirm that

competing parties were under no compulsion to act. Through such an examination, the

Commission can be satisfied that the resulting costs are at FMV for the services required.

In an effort to demonstrate the competitive nature of its process, the ATCO Utilities

argued that the tender/bid process steps implemented by ATCO were consistent with market

practice and that

145

These arguments are not responsive to the Commission’s principal concern. That concern is not whether the process steps employed were consistent with market practice or whether the

companies selected to bid on the subject transaction were sufficiently representative of the

“market,” that is, of the pool of potential bidders for a transaction of its type. Rather, the principal concern is whether the achievement of competitive MSA pricing was compromised by

the structure of the transaction itself. The Commission is satisfied that it was.

First, the weight of evidence supports that the requirement for the MSA service provider

to purchase ATCO I-Tek served as a restriction on competition and limited the pool of potential

bidders.

Mr. French, on behalf of Gartner, further

testified that the decision to require the IT service provider to purchase ATCO I-Tek was a

restriction on competition (a restriction on how bidders could respond to the request for

proposal).147 On this point, Mr. French was in agreement with Calgary’s independent witness, Mr. Edeson. Mr. Klawitter of KPMG likewise testified that the requirement that the IT service

provider also purchase ATCO I-Tek served to limit the pool of potentially interested parties148

and the evidence of the witnesses for each of Calgary and the UCA was consistent with all of the

above.

In the absence of evidence to the contrary, it is reasonable to conclude that all else equal,

more bidders would have likely resulted in lower MSA pricing. On this basis, the Commission is

satisfied that, on its own, the sourcing strategy (the decision to procure IT services from a

provider who would also be required to purchase ATCO I-Tek), had the potential to compromise

the achievement of competitive pricing for the MSAs.

Further and more significantly, the evidence supports that the combination of the

sourcing strategy and the actual tender/bid process (running the MSA and ATCO I-Tek sale

processes concurrently) was expected to and did influence MSA terms and pricing.

145 Exhibit 20514-X0491-CONF, the ATCO Utilities argument, paragraph 118.146 Transcript, Volume 1-CONF, pages 176-177.147 Transcript, Volume 2, pages 232-234.148 Transcript, Volume 2, pages 230-231.


Decision 20514-D02-2019 (June 5, 2019) • 25

The expectation of such influence is supported by the evidence and testimony of all of the

hearing participants, including the ATCO Utilities and their independent witnesses.

The actual influence of the sourcing strategy and the tender/bid process on the MSA

pricing is also well supported by: (i) the evidence of PAC and Mr. Edeson, which demonstrated

that the concurrent sale of ATCO I-Tek resulted in higher MSA pricing; (ii) Mr. Bell’s evidence for the UCA,

and (iii) ATCO’s own strategy documents and the resulting bids.

149 Exhibit 20514-X0110.21-CONF, KPMG Engagement letter, PDF page 2.150 Transcript, Volume 2-CONF, page 343.151 Exhibit 20514-X0441-CONF, KPMG rebuttal evidence, PDF page 17.152 Transcript, Volume 5-CONF, page 855.153 Transcript, Volume 5-CONF, page 856.154 Exhibit 20514-X0344-CONF, PDF page 152.155 Exhibit 20514-X0439-CONF, ATCO rebuttal evidence, paragraph 170.


Decision 20514-D02-2019 (June 5, 2019) • 26

The Commission considers that it can be reasonably inferred from ATCO’s strategy documents and the resulting bids that the ATCO I-Tek sale process influenced the MSA pricing.

As previously stated, those strategy documents included a direction to parties to

157

However, considering the totality of the evidence, the Commission agrees with the UCA

and Calgary that bidders altered their bids in a manner that demonstrates a relationship between

increases in the proposed ATCO I-Tek purchase price and in the proposed MSA pricing. In

making this finding, the Commission rejects the ATCO Utilities’ argument that

162

As will be discussed in greater detail below, notwithstanding variation in MSA pricing

among bidders during the bids and the likelihood that each has its own

machinations and may involve a degree of competitive posturing, the Commission considers that

these bids nevertheless provide relevant information on MSA pricing. Specifically, these bids

support a direct relationship between the upfront payment related to the sale of ATCO I-Tek and

the MSA pricing.

156 Exhibit 20514-X0344-CONF, PDF page 152.157 Exhibit 20514-X0268.17-CONF, page 1.158 Exhibit 20514-X0403-CONF, PAC Report, PDF page 35.

159 Exhibit 20514-X0303.24-CONF, ATCO-CAL-2017DEC19-022(b) Attachment 2 - 01

page 5. 160 Transcript, Volume 4-CONF, pages 669 and 674.161 Transcript, Volume 4-CONF, pages 670 and 674.162 Exhibit 20514-X0439-CONF, paragraphs 124-125.


Decision 20514-D02-2019 (June 5, 2019) • 27

the

conclusion that the sourcing strategy and tender/bid process employed by ATCO influenced the

MSA pricing and ultimately, the costs borne by the ATCO Utilities’ customers.

In making this finding, the Commission also acknowledges the ATCO Utilities’ assertion that to avoid any improper influence of the ATCO I-Tek sale on the MSA process and pricing,

ATCO engaged KPMG,

However, neither of these contentions is cogently supported by the evidence. The reasons why

the KPMG price assessment fails to establish that the MSA pricing was at FMV are discussed in

Section 5.2. The Commission finds the evidence on the degree of separation between the sale

and MSA processes contradictory.

Moreover, the

163 Exhibit 20514-X0110.21-CONF, KPMG Engagement letter, PDF page 2.164 Transcript, Volume 2-CONF, pages 380-381.165 Transcript, Volume 3-CONF, pages 407-408.


Decision 20514-D02-2019 (June 5, 2019) • 28

evidence cited in paragraphs 117 through 125 nevertheless demonstrates that the ATCO I-Tek

sale price was expected to, and did in fact, influence the MSA pricing.

Also of considerable significance is the absence of any compelling evidence that the

MSA pricing would have been the same or similar in the absence of the concurrent sale of

ATCO I-Tek.

Based on all of the above, the Commission finds that neither the sourcing strategy nor the

tender/bid process establish that the MSA pricing is at the level that would have prevailed under

an unrestricted, fully competitive process; that FMV for the MSAs on a stand-alone basis was

achieved; or more broadly, that the inclusion of MSA costs in revenue requirement would result

in just and reasonable rates.

5.2 KPMG price assessment, Gartner benchmark, glide path and COLA analyses Views of the ATCO Utilities

In the context of acquiring required IT services, FMV means the price to be paid for

services that meet the utility’s needs and requirements and enable it to provide safe and reliable service. In determining FMV there should be no cross-subsidization between ATCO’s regulated and unregulated subsidiaries. This is the basis upon which FMV should be determined consistent

with the definition of FMV that has been applied by the Commission in all past regulatory

proceedings involving the approval of affiliate IT costs for inclusion in utility revenue

requirement.169

166 Transcript, Volume 5-CONF, page 841.167 Transcript, Volume 2-CONF, pages 332-333.168 Transcript, Volume 5-CONF, page 861.169 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 19.


Decision 20514-D02-2019 (June 5, 2019) • 29

The KPMG price assessment and Gartner benchmark demonstrate that the IT MSA rates

negotiated with Wipro are at FMV, involve no cross-subsidization and, therefore, should be

approved as filed.

In its price assessment, dated January 23, 2015, KPMG concluded that:

… the MSA pricing reflects market competitive pricing and, hence a competitive deal, for the initial year of the contracts. In fact, in all cases the services are below both the

peer group average and the peer group 50th percentile. KPMG has also examined the

downward glide-path reflected in the Wipro agreements and considers that this glide-path

will operate to ensure that the MSA pricing remains competitive on a go-forward basis.

This is particularly the case given that the "base" starting prices are often well below both

the peer group average and the peer group 50th percentile, sometimes even better than the

25th percentile. In addition, the MSAs contain a benchmarking provision that provides an

opportunity to recalibrate the pricing at month 42 of the term, designed to ensure that fair

market value pricing is maintained.

…On the basis of our involvement during the negotiations process and our analysis of the

results of the negotiations using our standard methodology, KPMG concluded that on

balance the commercial terms and conditions contained in the Agreements reflect leading

market practices.170

The Gartner benchmark concluded that the MSA pricing, on an aggregate basis, falls

within of the benchmark FMV for the first year of the MSA. The benchmark report

described Gartner’s scope of work and the basis for its opinion as follows:171

ATCO Utilities receive Information Technology (IT) services from Wipro, under a

contract entered into during 2014. The rates and charges under the Wipro contract are

part of the costs and rate base regulated by the Alberta Utilities Commission (AUC).

To confirm that the contract pricing rates as established in 2014 were in alignment with

then-current market rates and conditions, Gartner was engaged to evaluate and

benchmark the services and prices.

Gartner performed a comprehensive outsourcing contract benchmark analysis, consisting

of the following:

For IT Infrastructure Services, Gartner performed a detailed Contract Price

Benchmark (CPBM) for services with comparable content, scope, service structure,

and SLAs [Service Level Agreements] as compared to marketplace peer contracts

For IT Applications Services, Gartner performed a Function Point Analysis

benchmark to evaluate the market price for a comparably sized and complex

applications environment

For Project Services, Gartner performed a Labor Rate benchmark for defined contract

project labor categories

Third party items in the contract, such as “pass through” charges, are considered tobe Fair Market Value

170 Exhibit 20514-X0037-CONF, PDF pages 25-26.171 Exhibit 20514-X0124, Gartner benchmark report, PDF page 4.


Decision 20514-D02-2019 (June 5, 2019) • 30

The ATCO Utilities acknowledged that KPMG’s price assessment and Gartner’s benchmark focused only on the first-year (2015) pricing of the IT MSA services. However, in its

price assessment, KPMG concluded that the glide path in the MSAs was consistent with what it

had seen in the marketplace. Gartner’s rebuttal evidence 172 provided a pricing glide path and

COLA terms analysis,

The intervener argument that the purchase price paid by Wipro for ATCO I-Tek is

embedded in the MSA pricing and will be recovered from payments for the provision of required

IT services is entirely without merit and there is no evidence to support it. Rather, the evidence is

to the contrary:

Based on the above, there was no cross-subsidization despite the assertions made by

parties. The competitive tender process employed by ATCO, the KPMG price validation, the

Gartner comprehensive benchmark and the Gartner glide path analysis all confirm that the

pricing contained in the MSAs was reflective of FMV.174 In particular, the Gartner benchmark,

pricing glide path and COLA analysis were prepared independently by Gartner, and

Rather, the benchmark was

conducted in accordance with Gartner’s standard methodology, using actual current market

contract comparisons.175

In response to the arguments advanced by interveners questioning the validity of price

assessments and benchmarks in the regulatory environment, the ATCO Utilities rely on the

evidence of Mr. Klawitter who confirmed that a price assessment is the tool typically used and

relied upon by commercial parties when making decisions in the real world about whether the

pricing contained in an MSA is at FMV. The ATCO Utilities assert that “the KPMG Price

172 Exhibit 20514-X0440-CONF, Gartner rebuttal evidence.173 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 32.174 Exhibit 20514-X0497, ATCO Utilities reply argument, paragraph 152.175 Exhibit 20514-X0497, ATCO Utilities reply argument, paragraph 222.176 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 75.177 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 107.


Decision 20514-D02-2019 (June 5, 2019) • 31

Assessment stands as a valid and reliable tool that confirms that the MSA pricing is at Fair

Market Value.”178

detailed evidence on the Gartner benchmark far

exceeded the information previously made available to the Commission.179

Responding specifically to the intervener argument alleging limited transparency or “the black box” approach of the Gartner report, the ATCO Utilities identified approximately 40 exhibits and numerous transcript references wherein Gartner provided information on database

size and data, peer selections, normalizations, tower analysis approach, exchange rate, analysis

time frame and process.

Consequently, the Gartner benchmark can be relied upon as providing sound and reliable

information upon which a decision can be made for ratemaking purposes.

178 Exhibit 20514-X0491, ATCO Utilities argument, paragraph 34.179 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraphs 39-40.180 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 203.181 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraphs 82-84.182 Transcript, Volume 5-CONF, pages 777-778.183 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 215.184 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 90.


Decision 20514-D02-2019 (June 5, 2019) • 32

In response to Calgary’s assertion that Gartner’s glide path assessment failed to consider transformational outsourcing benefits,

The ATCO Utilities asserted that the evidence presented by the interveners is of little

assistance to the Commission.

The expertise of the UCA’s witness to conduct a benchmark was challenged.

PAC’s evidence was flawed for the following reasons: 191

An erroneously assumed relevance of prior ATCO I-Tek prices.

An incorrect assumption that there are no first-year savings in the MSA.

An invalid claim that all savings are in the glide path.

An illogical claim that it is not possible to benchmark the MSA, despite the leading IT

benchmarking firm, Gartner, performing a benchmark.

185 Exhibit 20514-X0481-CONF, Undertaking 6.186 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 198.187 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 196.188 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraphs 210 and 225.189 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraphs 8 and 173.190 Transcript, Volume 5-CONF, page 878.191 Exhibit 20514-X0439.01, ATCO Utilities rebuttal evidence, paragraph 20.


Decision 20514-D02-2019 (June 5, 2019) • 33

and ignores the negotiation of a contract as a whole. Calgary and PAC did not provide any actual

market evidence to show that their glide path could be achieved in the marketplace. As noted by

KPMG and Gartner, pricing in the marketplace is based on the scope, scale and requirements of a

client and not based on notional differences between Calgary’s transformational versus operational IT outsourcing perspective.193

Views of Calgary There were numerous deficiencies in the KPMG price assessment:

the

Commission in the Evergreen II decision.195

Similarly, there were numerous shortcomings in the Gartner report:

ATCO had significant participation at various stages of the benchmark process.

The Gartner benchmark report was 2.5 years after the MSAs were executed and is not

consistent with the Commission’s finding from the Evergreen II decision.196

192 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 107.193 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 210; Exhibit 20514-0440 CONF,

PDF pages 17-19; and Exhibit 20514-X0441, PDF page 19. 194 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraphs 213-217.195 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 102-106.196 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 109, 113, and 115.


Decision 20514-D02-2019 (June 5, 2019) • 34

The MSAs contain legacy ATCO I-Tek costs and operations,

Customers should benefit

from the steeper glide paths that were ordered in the Evergreen II decision.

Views of the UCAIn assessing FMV:

The Commission should weigh all of the relevant evidence on the record of the

proceeding, rather than relying on a single methodology or number.

The utilities should also have an obligation to drive down prices to the lower end of that

range, even where the prices paid may fall within a reasonable FMV range.

The Commission should consider whether the utilities chose the least cost alternative that

would allow them to provide safe and reliable service.

197 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 143.198 Exhibit 20514-X0473-CONF, Calgary Aid to Cross #6, Summary of I-Tek Financials.199 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 129-139.200 Exhibit 20514-X0403-CONF, PAC Report, PDF page 77.201 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 90-91.202 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 168-171.203 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 95-96.204 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 93-94.205 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 97.206 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 109.


Decision 20514-D02-2019 (June 5, 2019) • 35

The FMV assessment should be made based on information known to the utilities at the

time the MSAs were negotiated and executed, because their prudence should be assessed

at the time they made the decision, not based on hindsight.

The FMV assessment should consider whether FMV was achieved based on the total

volumes under the MSAs for all ATCO companies, not only the utilities.207

The Commission should hold the ATCO Utilities to their onus, which is to demonstrate

that “the pricing under the MSAs is at or below FMV; the pricing under the MSAs is the lowest cost alternative to procure services required to provide safe and reliable service; customers are

not harmed by the ATCO Utilities’ sourcing strategy; the Utilities’ sourcing strategy reflects prudent practices that minimized the costs to ratepayers.”208

It is incumbent upon the ATCO Utilities to demonstrate that the first-year pricing and the

pricing over the term of the agreement are at or below FMV. The ATCO Utilities have failed to

establish that first-year pricing or the glide path is at or below FMV.209

KPMG’s price assessment provided no analysis of what KPMG considered, the conclusions it reached, and why the Commission should rely on it.

The concerns expressed by the Commission in the Evergreen II decision regarding the

use of a price assessment for regulatory purposes are still relevant to the current proceeding:

433. Further, the ATCO Utilities stated that ISG (Information Services Group) had

been engaged to assist in their negotiations with ATCO I-Tek. However, the Commission

heard evidence that the ATCO Utilities personnel and ATCO I-Tek personnel had

attended joint sessions at which ISG consultants helped the parties determine a fair

market value. The Commission’s impression is that these sessions would not help innegotiating prices because the parties were not adverse in interest. The decision that

ATCO I-Tek would provide all of the services through a sole source contract had already

been made, meaning that any leverage in the negotiations that the work might go

elsewhere had been removed and any potential to lower costs to consumers by seeking

alternate suppliers of various parts of the services through multi-sourcing arrangements

was lost. Indeed, there had been no new benchmarking or price review undertaken when

these sessions took place. It was only after the PAC evidence was submitted that there

was a price review. The subject matter of the joint sessions and other dealings between

the parties seemed to be focussed on modernizing the service offerings to better match

what was happening in the market and on trending prices based on the 2003 benchmarks

to arrive at the prices for 2010 and the trending from those prices for the 2011 to 2015

period – much for the purpose of a regulatory filing.210

For the same reasons that this approach was found imprudent in the Evergreen II

decision, the price assessment should be found imprudent in this proceeding.

207 Exhibit 20514-X0494, UCA argument, paragraph 35.208 Exhibit 20514-X0500, UCA reply argument, paragraph 47.209 Exhibit 20514-X0500, UCA reply argument, paragraph 51.210 Decision 2014-169 (Errata), paragraph 433.


Decision 20514-D02-2019 (June 5, 2019) • 36

The Commission cannot rely on the Gartner report to establish that the MSA pricing

reflects FMV because of its numerous flaws.

While KPMG’s tolerance was not identified, it appeared to be even broader.217 The Commission should not be bound by Gartner’s tolerance range.218

and which

211 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph70.212 Exhibit 20514-X0494-CONF, UCA argument, paragraph 112.213 Exhibit 20514-X0037, AP-AUC-CONF-2015FEB03-091(d), PDF pages 874-876, Schedule O. See definitions

and 3.1(a)(v). 214 Exhibit 20514-X0494-CONF, UCA argument, paragraph 112.215 Exhibit 20514-X0494-CONF, UCA argument, paragraph 112.216 Transcript, Volume 2-CONF, page 237, lines 19-25.217 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph 42.218 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph 46.219 Transcript, Volume 1-CONF, page 87, lines 8-13.220 Exhibit 20514-X0344, ATCO-UCA-CONF-2017DEC19-006, PDF page 181.221 Exhibit 20514-X0482, Confidential Undertaking 5.


Decision 20514-D02-2019 (June 5, 2019) • 37

the ATCO Utilities admitted was a key driver for the decision.

5.2.1 Commission findings The ATCO Utilities have failed to satisfy the Commission that the KPMG price

assessment and Gartner analyses establish, individually or collectively, that the MSA pricing is

at FMV, involves no cross-subsidization and that if included in revenue requirement, the MSA

prices would result in just and reasonable rates. The reasons and evidence relied upon in support

of this finding are discussed below.

5.2.1.1 Lack of transparency Gartner’s benchmark approach identifies differences between the MSA and the selected

peer contracts, and takes these differences into account through a normalization process.

KPMG’s price review identifies key parameters about the MSA, then selects a larger group of peers and offers market pricing ranges without normalization for differences. The Commission is

of the view that a benchmark with normalizations allows for a more rigorous examination of

FMV, while KPMG’s price assessment offers a more high-level perspective of FMV.

Both the KPMG and Gartner approaches use actual contract or peer information to assess

IT MSA pricing, while PAC/Calgary and the UCA rely predominantly on industry experience.

The Commission considers that actual market contract comparator information generally

provides for a more reliable assessment of FMV. However, a key consideration in determining

the weight to be given to such evidence is the degree of transparency into the benchmark and

price assessment processes.

In rebuttal evidence, Gartner submitted that:224

ATCO and Gartner have placed significantly more detail on the record than was provided

by other benchmarking firms in prior ATCO regulatory submissions, both in the initial

filing, and subsequently through the IR process.

Despite the additional detail provided in this proceeding, there remains limited

transparency into how comparable peers were determined by Gartner, the empirical size and

relative importance of any normalizations applied to the comparator data, and the underlying

calculations in the benchmark report.

222 Exhibit 20514-X0500-CONF, UCA reply argument, paragraph 77.223 Exhibit 20514-X0494-CONF, UCA argument, paragraph 114.224 Exhibit 20514-X0440-CONF, Gartner rebuttal evidence, PDF page 6.225 Transcript, Volume 2-CONF, page 262.


Decision 20514-D02-2019 (June 5, 2019) • 38

The

Commission has previously expressed, and continues to hold the view, that evidence based on

proprietary analysis or proprietary data is of limited assistance in its proceedings. In Decision

2012- 237, the Commission explained:

355. While there is nothing inherently wrong with using proprietary data in regulatory

proceedings, procedural fairness requires that parties must be provided with the

opportunity of a fair hearing in which each party is given the opportunity to respond to

the evidence against its position. This requirement clearly requires parties and the

Commission to be able to fully understand, test and respond to the evidence filed in a

proceeding. Further, the Commission has the obligation to provide reasons for its

decisions. It can only do so if it is able to fully understand, test and analyze the evidence

filed before it.227

In the Evergreen II decision, the Commission expressed concerns specific to

benchmarking and, more particularly, about the degree of subjective normalizations associated

with, and the lack of transparency into, that process:228

436. The Commission has examined the different approaches to benchmarking offered

by the various consultants. Each seek to find suitable comparators for the services they

are benchmarking. While there are certainly differences in their approaches, the fact

remains that both companies used their expertise to examine prices and price trends

available in the market for like services against which to benchmark the Master Services

Agreement prices. Both also engaged in normalization processes and other techniques in

an effort to make their benchmarking comparisons as close to “like for like” as possible.

437. In addition, the two groups of consultants normally engage in benchmarking in

order to advise clients on what they should expect to see when negotiating a service

contract as part of a competitive process. In an openly competitive process it is the final

result of the negotiations that determines fair market value, not the opinions of the

benchmarking consultants. In this case, there has not been an open competitive process to

reveal the fair market value price. As a result, the Commission is called upon to examine

the benchmarking evidence. However, in this case, many of the critical details of the

226 Transcript, Volume 2-CONF, page 376.227 Decision 2012-237: Rate Regulation Initiative, Distribution Performance-Based Regulation, Proceeding 566,

Application 1606029-1, September 12, 2012. 228 Decision 2014-169 (Errata) Confidential, paragraphs 436-437 and 464-465.


Decision 20514-D02-2019 (June 5, 2019) • 39

benchmarking performed by both groups of consultants were withheld because the

information was considered by them to be competitively sensitive. In addition, the

Commission’s ability to examine the facts was limited because it has not been the Commission’s practice to examine confidential information unless it is also provided to the parties (the applicant and interveners) subject to a confidentiality undertaking. The

Commission was also not able to see and compare the contracts selected by the

consultants and the individuals who chose the comparator contracts for use by the

consultants were not made available for questioning by the Commission. Indeed, it was

not clear what the qualifications of the individuals selecting the comparator contracts

were.…

…

464. The use of benchmarking to justify the prices charged by a for-profit affiliate

(whether by a collaborative process or otherwise) has created a substantial regulatory

burden over a long period of time and has not increased the Commission’s confidence inthe outcomes. The Commission’s concerns are further exacerbated when the costs ofthese related proceedings, which are paid for by ratepayers, are considered. The ATCO

Utilities have claimed costs in excess of $8.2 million in relation to proceedings preceding

this current application. The cost estimates for this proceeding up to May 11, 2012

exceed $2.8 million.

465. This has also resulted in having placeholders for rates and no finality of pricing

for an unsatisfactory length of time for both the utility and utility customers in this

proceeding and previously. The Commission has determined that the efficiency and

effectiveness of the present regulatory testing of benchmarking processes cannot continue

unchanged. In particular, the refusal of the benchmark consultants to make critical

information available to the Commission and the failure of any of the parties to provide

publicly available information to corroborate their evidence and support their assertions

has contributed to the difficulty in making a decision in this proceeding, an unduly

adversarial character of the proceedings and, in turn, the protracted timeline.

A competitive outsourcing process would avoid many of these previously discussed

pitfalls. [footnotes omitted]

Many of the concerns expressed in the above decisions exist here. Despite the additional

volume of information disclosed, the Commission continues to have limited visibility into the

selection of comparator contracts, the comparator contracts themselves, the normalization

processes employed by Gartner in its benchmark and some of the other critical details of the

benchmarking performed.

For example, the Commission agrees with interveners that because of the lack of

visibility into these processes, it is not apparent whether or how Gartner (through its

normalizations) or KPMG (through its final report) accounted for the term of the MSAs or the

TCV of those agreements in their respective price analyses. The significance of the term of the

MSAs and their TCV to pricing is discussed later in this decision.

that the benchmark does

not therefore offer an inflated FMV.


Decision 20514-D02-2019 (June 5, 2019) • 40

In summary, the lack of visibility described above: (i) restricts the ability of interveners

and the Commission to properly examine the KPMG and Gartner evidence; (ii) limits the

Commission’s ability to assess whether the conclusions reached by KPMG and Gartner in their respective reports were reasonably adjusted and aligned to the MSAs to provide a meaningful

FMV determination; (iii) inhibits the Commission’s ability to effectively rely on either report as

demonstrating that the MSA pricing is at FMV; and (iv) ultimately, does not assist the

Commission in determining whether the MSA pricing is just and reasonable.

In short, the lack of visibility significantly diminishes the weight that may be afforded to

the KPMG price assessment and the Gartner benchmark.

5.2.1.2 Limited to first year pricing; failure to consider the total contract value Another but related factor significantly limiting the weight that can be afforded to either

the KPMG price assessment or the Gartner benchmark is that both looked

can otherwise be demonstrated to result in just and reasonable rates.

This is a significant omission when considering IT service agreements with a 10-year term,

particularly in light of the evidence discussed in Section 5.4, which supports that when the MSAs

were negotiated, the trend was for shorter term IT contracts.

To illustrate the concern, Gartner’s benchmarking analysis determined FMV to be However, the total contract value of the ATCO Utilities’ 10-year MSAs has

been stated as approximately 229 Although the Gartner benchmark purports to show

that first-year (2015) pricing under the MSAs was at FMV, it provides little insight, if any, into

whether the 10-year MSA pricing is at FMV or the rates over the whole of the term are just and

reasonable.

Nevertheless, as stated earlier, because of the lack of visibility into the processes

employed,

the Commission is likewise unable to accept that

Gartner’s glide path analysis demonstrates that MSA pricing is at FMV over the whole of the term. A more detailed discussion of these matters is found in the sections that follow.

5.2.1.3 Failure to consider total transaction volume and inconsistent evidence on volumes

Also undermining the value of the Gartner benchmark (and its glide path analysis) is

Gartner’s failure to consider, in its analyses, the ATCO Group volumes

229 Exhibit 20514-X0480.01-CONF, Undertaking 14 attachment, NPV- Glide Path.


Decision 20514-D02-2019 (June 5, 2019) • 41

The evidence is clear that Gartner relied solely on the ATCO Utilities230 volumes

The Commission acknowledges that in previous proceedings, benchmarks and price

validations considered only utility volumes, and this is the methodology that Gartner used in its

benchmark analysis. However, benchmark volume should align with the total transaction volume

used to negotiate the MSAs. The reason for this was identified by both KPMG and Gartner;

pricing in the market is based on “scope, scale and requirements”233 of the client.

The MSA pricing should therefore reflect these total volumes 234 as should the

benchmark. The failure of the benchmark to do so significantly undermines the extent to which it

can be said to accurately reflect the actual market transaction of the IT services contract with

Wipro and, therefore, its value as evidence supporting the determination of FMV for that

transaction.

The Commission accepts the evidence of PAC and Calgary235 that by using only the

ATCO Utilities’ volumes in its analysis,

Gartner’s evidence was consistent with this view.

Given Gartner’s failure to consider the total transaction volume used to negotiate

the MSAs, the Commission finds that the Gartner benchmark understates the variance between

the MSA pricing and the benchmark FMV.

230 Transcript, Volume 1-CONF, page 95, lines 4-10; and Exhibit 20514-X0221, ATCO-(GARTNER)-CAL-

CONF-2017MAR31-023(g). 231 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 198.232 Transcript, Volume 2-CONF, pages 362-366.233 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 210; Exhibit 20514-0440 CONF,

PDF pages 17-19; and Exhibit 20514-X0441, PDF page 19. 234 Exhibit 20514-X0036-CONF, AP-CAL-CONF-2015FEB03-004(g) Attachment, ATCO Consolidated Baseline

Volumes-Annual. 235 Exhibit 20514-X0403, PAC evidence, PDF page 88, and Exhibit 20514-X0492-CONF, Calgary final argument,

paragraphs 35 and 112-115. 236 Transcript, Volume 1-CONF, page 200, lines 1-4.


Decision 20514-D02-2019 (June 5, 2019) • 42

The degree to which the Gartner benchmark understates that variance and the

significance of that variance relative to the determination of the FMV of the MSAs cannot be

determined with certainty from the available evidence. However, the Commission notes that

Gartner’s benchmark concluded that the MSA prices were already above the

benchmark FMV based on the volumes of the ATCO Utilities.

The plausibility of this

prospect further undermines the weight to be given to the benchmark.

Given the significance of volumes, the Commission is troubled by the apparent

inconsistency between the weight being attached by Gartner to volumes in its benchmark FMV

This

apparent inconsistency casts further doubt on the Commission’s ability to rely on Gartner’s benchmark.

. This may ultimately result in different conclusions on

FMV and the MSA pricing.

237 Transcript, Volume 1-CONF. page 199, lines 15-25 and page 200, lines 1-4.238 Exhibit 20514-X0494-CONF, UCA argument, paragraph 112.239 Exhibit 20514-X0481-CONF, Undertaking 6.240 Transcript, Volume 1-CONF, page 199, lines 13-25.241 Exhibit 20514-X0497, ATCO reply argument, paragraph 198.242 Exhibit 20514-X0481-CONF, Undertaking 6.243 Exhibit 20514-X0481-CONF, Undertaking 6.244 Transcript, Volume 1-CONF, page 159, lines 23-24.


Decision 20514-D02-2019 (June 5, 2019) • 43

As is discussed in greater detail below, Gartner’s glide path analysis and TCV conclusion, filed in rebuttal evidence, is likewise flawed for reasons that include consideration of

only the ATCO Utilities’ volumes.

Ultimately, the Commission considers that the failure to consider the total transaction

volume limits the reliability and accuracy of the Gartner benchmark and its glide path and TCV

analyses.

The Commission acknowledges that the KPMG price assessment did consider total

transaction volume.

Further, and in any event, consideration of the total

transaction volume does not negate the other inherent weaknesses of the price assessment

Additionally, the Commission observes that in its rebuttal evidence, KPMG stated:

A price assessment is routinely done during the sourcing process to validate pricing as

part of fair market value. The sourcing and negotiations process drive the other aspects of

fair market value such as service levels and risk management. The combination of a

market competitive sourcing process and a price assessment is usually sufficient to ensure

fair market value.245 [emphasis added]

Given KPMG’s view, as expressed in the quote above, and the Commission’s concerns about the sourcing strategy and tender/bid process described earlier, the Commission considers

that a price assessment is insufficient on a stand-alone basis to ensure that MSA rates were at

FMV or would otherwise result in just and reasonable rates.

5.2.1.4 Benchmark focuses on the mean and not the lowest price of first quartile Gartner’s evidence was that benchmarking to the lowest quartile of pricing is commonly

seen in the market.

On this basis, the Commission concludes that using a benchmark that focuses on the

mean and not lowest quartile pricing supports higher customer rates than could otherwise be

obtained, and consequently rates that are not just and reasonable. This approach is another reason

245 Exhibit 20514-X0441, PDF page 5.246 Exhibit 20514-X0344, ATCO-UCA-CONF-2017DEC19-006, PDF page 189.247 Exhibit 20514-X0482, Confidential Undertaking 5.


Decision 20514-D02-2019 (June 5, 2019) • 44

why the Gartner benchmark cannot be reasonably relied upon as evidence that the MSAs meet

the FMV, least cost alternative and no-harm tests, and would result in just and reasonable rates.

5.2.1.5 Neither the price assessment nor the benchmark refute the possibility of cross-subsidization

The ATCO Utilities argued that the KPMG price assessment and Gartner benchmark

refute the possibility of cross-subsidization between the ATCO I-Tek sale and the MSAs because

had cross-subsidization occurred, it would have been impossible for these independent studies to

have found the MSAs to be at FMV.248

This argument is premised upon the Commission’s acceptance of the price assessment

and benchmark as persuasive evidence that the MSAs were at FMV. For all the reasons

previously described, the Commission is unable to accept that proposition.

Furthermore, the Commission has found that the concurrent sale of ATCO I-Tek did

influence MSA pricing. More specifically, on the evidence and for the reasons detailed in

Section 5.1, the Commission finds that MSA pricing was higher than it otherwise would have

been as a consequence of the concurrent sale and purchase price for ATCO I-Tek.

While the manner in which ATCO chose to structure the transaction obscures the

Commission’s ability to clearly assess the specific extent of any cross-subsidization between

shareholders and ratepayers, the evidence suggests that some cross-subsidization of the ATCO

I-Tek sale proceeds from the prices paid by the ATCO Utilities under the MSAs has occurred.

As discussed earlier and acknowledged by the ATCO Utilities, such cross-subsidization,

constitutes improper influence on the pricing of IT services under the MSAs and is further reason

why the MSA prices cannot be considered just or reasonable.

5.2.1.6 Glide path and total contract value analysis In evaluating whether the MSA pricing yields just and reasonable rates in the case of a

multi-year service agreement, particularly one with a 10 year term, the focus cannot solely be on

first-year pricing. The reasons for this include that first-year pricing, even if itself reasonable, is

not necessarily indicative or determinative of whether pricing over the whole of the term is

reasonable. This is particularly so when a glide path is applied to adjust prices from the initial

level over the term of the agreement.

The amount of these reductions is dependent upon the

slope of the glide path. A steep glide path results in greater price reductions over time than a

flatter glide path.250 An evaluation that considers only first-year pricing would not take into

account price adjustments over the term, nor account for the significance of a steep versus a flat

glide path.

248 Exhibit 20514-X0491, ATCO Utilities argument, paragraph 144.249 Exhibit 20514-X0440-CONF, Gartner rebuttal evidence, PDF page 9.250 Exhibit 20514-X0403, PAC report, PDF page 16.


Decision 20514-D02-2019 (June 5, 2019) • 45

Gartner considered the competitiveness of the MSA glide path in rebuttal evidence only,

as a counter to Calgary’s evidence from PAC.

The Commission is unable to accept Gartner’s glide path analysis as compelling evidence

that MSA pricing is at FMV over the whole of the term. The reasons for this finding include

Gartner’s failure to consider total transaction volume and concerns related to the lack of

transparency associated with Gartner’s comparator selections,

The Commission shares the UCA’s concern. For all the reasons described earlier, it is not apparent that Gartner’s report is based on sufficiently similar comparator contracts.

Further, and of considerable significance, Gartner’s analysis is contradicted by both PAC

and KPMG, both of which rely upon more specific data

251 Exhibit 20514-X0440-CONF, Gartner rebuttal evidence, PDF page 10.252 Transcript, Volume 3-CONF, page 420, lines 18-25, and page 421, lines 1-11.253 Exhibit 20514-X0494-CONF, UCA argument, paragraph 114.254 Exhibit 20514-X0403-CONF, PAC evidence, PDF pages 78-79.


Decision 20514-D02-2019 (June 5, 2019) • 46

The Commission considers that on the whole, the supports PAC’s evidence

As the PAC evidence is supported by the KPMG evidence, the Commission affords it

greater weight than the Gartner glide path analysis.

The Commission also notes Gartner’s admission that it was atypical for it to perform a TCV analysis as compared to its point-in-time benchmark of first-year prices. While not

determinative, Gartner’s relative inexperience with TCV analyses is a further consideration

affecting the weight of that evidence.

255 Exhibit 20514-X0403-CONF, PAC evidence, PDF pages 83-84.256 Transcript, Volume 5-CONF, page 1013, lines 4-15.257 Transcript, Volume 5-CONF , page 1003, lines 3-15.258 Transcript, Volume 5-CONF pages 1046-1048.259 Exhibit 20514-X0474-CONF, KPMG draft report, PDF page 23.260 Exhibit 20514-X0441, KPMG rebuttal evidence, PDF pages 15 and 23.261 Exhibit 20514-X0474-CONF, KPMG draft report, PDF page 23.


Decision 20514-D02-2019 (June 5, 2019) • 47

5.3

between ATCO and

Wipro in an effort to further demonstrate that MSA pricing is not at FMV, does not meet the

least cost alternative, no-harm and prudence tests, and would not result in just and reasonable

rates. The ATCO Utilities offered evidence and argument in response.

Views of the ATCO Utilities

262 Exhibit 20514-X0375, ATCO-CAL-CONF-2018JUN05-035(l), Attachment, starting at PDF page 146.263 Exhibit 20514-X0375, ATCO-CAL-CONF-2018JUN05-035(k).264 Exhibit 20514-X0375, ATCO-CAL-CONF-2018JUN05-035(l) Attachment, Schedule “B”

starting at PDF page 165. 265 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 267.


Decision 20514-D02-2019 (June 5, 2019) • 48

Views of Calgary

266 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 113.267 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraphs 113-114.268 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 73.269 Exhibit 20514-X0498-CONF, Calgary reply argument, paragraph 310.270 Exhibit 20514-X0498-CONF, Calgary reply argument, paragraph 35.


Decision 20514-D02-2019 (June 5, 2019) • 49

Views of the UCA

5.3.1 Commission findings

271 Exhibit 20514-X0494-CONF, UCA argument, paragraph 144.272

273

(Exhibit 20514-X0344-CONF,

ATCO-UCA-CONF-2017DEC19-006 Attachment 12, PDF page 206.) 274 Exhibit 20514-X0301.01-CONF


Decision 20514-D02-2019 (June 5, 2019) • 50

This argument is undermined by the fact that the MSAs (for example, in establishing

project volume thresholds) and expressly contemplates the

possibility of IT volumes exceeding the baseline MSA volumes. This is particularly significant in

light of the evidence that of the total IT volumes that will be handled by Wipro, the bulk of these

volumes arise from the ATCO Utilities.

Considered together, these

facts reasonably support that at the time the MSAs were negotiated, there was an expectation that

the ATCO Utilities IT volumes could be much higher than the baseline volumes of the MSAs.

The exact amount of additional ATCO Utilities IT volume that was or could reasonably

have been anticipated at the time the MSAs were negotiated cannot be determined with any

degree of certainty. However, the Commission is satisfied that it was not an insignificant amount

and the ATCO Utilities’ ITspend over the first three years of the MSAs.

in any event, the potential variability in spend between years does not

negate the finding that at the time the MSAs were negotiated, there was an expectation that the

ATCO Utilities’ IT volumes could be much higher than the baseline volumes of the MSAs.

It is also impossible to determine with certainty the specific effect that the additional

ATCO Utilities’ IT volumes reasonably anticipated at the time the MSAs were negotiated would

275 Exhibit 20514-X497-CONF, ATCO Utilities reply argument, paragraph 267.276 Exhibit 20514-X0401 CONF, Evidence of the City of Calgary, PDF page 7, lines 3-4. This is derived from

Exhibit 20514-X0344 CONF, ATCO-UCA-CONF-2017Dec19-006, Attachment, PDF page 228. 277 Transcript, Volume 4-CONF, pages 582, line 24 to page 583, line 13.278 Based on Exhibit 20514-X0375-CONF, ATCO-CAL CONF 2018JUN05-035 (l) Attachment PDF pages 146-

196,

Exhibit 20514-X0344, ATCO-UCA-

CONF 2017DEC19-006, Attachment 11, PDF page 189. 279 Transcript, Volume 6-CONF, page 1005, lines 5-15.280 Exhibit 20514-X0403-CONF, PAC Report, PDF page 54.281 Transcript, Volume 5-CONF, page 825, lines 2-7.


Decision 20514-D02-2019 (June 5, 2019) • 51

have had on the MSA pricing had they been included.

Based on this,

the evidence that the bulk of the total IT volumes that will be handled by Wipro arise from the

ATCO Utilities,

it is reasonable to conclude that if the additional

ATCO Utilities’ IT volumes had been contemplated in the

MSAs, the MSA pricing would have been lower.

282 Transcript, Volume 1-CONF, page 200, lines 1-4.283 Transcript, Volume 5-CONF, starting at page 785, line 3 and ending at page 786, line 14.


Decision 20514-D02-2019 (June 5, 2019) • 52

A similar relationship between the ATCO I-Tek sale price and the MSA pricing was

observed. As noted in Section 5.1,

284 Transcript, Volume 6-CONF, page 1005, lines 1-4.


Decision 20514-D02-2019 (June 5, 2019) • 53

further reasons why the Commission is not

satisfied that the MSA pricing meets the FMV, no-harm, least cost alternative or prudence tests

and would result in just and reasonable rates.

5.4 10-year term of the MSAsViews of the ATCO Utilities

The ATCO Utilities pursued a 10-year term for the MSAs in order to avoid the costs and

risks associated with transitioning and renewing agreements, while capturing the cost savings

present within a 10-year term. In rebuttal evidence, the ATCO Utilities stated:

The effort of changing providers includes requirements gathering, creation of a new IT

MSA, engaging the market to secure a new provider, bidder assessment, due diligence,

negotiations, transition, realization of benefits through innovation and service model

changes and on-going operational management. Many of the same steps and activities are

required to renew an agreement with an incumbent IT service provider. The time and

effort to perform these activities is a material effort that must be undertaken with enough

time remaining on an existing agreement to complete prior to the scheduled expiry. The

10-year term of the Wipro MSAs gives ATCO including the ATCO Utilities, the ability

to avoid these costs and associated risks if the agreement is operating to the satisfaction

of the ATCO Utilities.287

Both Mr. Klawitter and Mr. French confirmed that there is cost and risk associated with

transitioning between and renewing contracts. Both of these witnesses also testified that there

were numerous deals in the marketplace of a similar term and volume, and that the IT MSAs

with Wipro were not atypical.288

The downward normalization on pricing for a longer length and larger spend in the

Gartner benchmark is consistent with PAC’s statement that “Longer and larger deals should

provide lower prices.”289 290 The benchmark is therefore reliable evidence that the MSAs are at

FMV.

285 Transcript, Volume 5-CONF, page 817, lines 6-11.286 Exhibit 20514-X0375-CONF, ATCO-CAL-CONF-2018Jun05-035(k), PDF pages 140-141.287 Exhibit 20514-X0439, page 34, paragraph 57.288 Transcript, Volume 1, pages 72-74 and 117.289 Exhibit 20514-X0403, PDF page 56.290 Transcript, Volume 1, page 113.


Decision 20514-D02-2019 (June 5, 2019) • 54

Further, any risk associated with term length of the MSAs is mitigated by the terms and

conditions negotiated by ATCO and the ATCO Utilities.

Views of Calgary The MSAs are for an unusually long term compared to the market. This should have

lowered MSA prices, which PAC confirmed did not occur.297

Figure 20 in the PAC report displayed “the difference in size and scale” between the MSAs and “similar ІТО [IT outsourcing] deals for Canadian utilities and energy clients.”298 This

evidence establishes the accuracy of PAC’s conclusion that the MSAs represented a market

outlier and so presented an opportunity for reduced prices and improved glide path savings in

exchange for the longer term deal.299

Views of the UCA

291 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 93.292 Transcript, Volume 3-CONF, pages 508-509.293 Transcript, Volume 3-CONF, pages 505-509, 588-591.294 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 94.295 Transcript, Volume 3-CONF, pages 421-423; and Transcript, Volume 4-CONF, pages 625-626.296 Transcript, Volume 1-CONF, pages 64-65.297 Exhibit 20514-X0403, PAC Report, PDF pages 7 and 56.298 Exhibit 20514-X0403, PA Report, PDF page 58, report page 54.299 Exhibit 20514-X0403, PA Report, PDF page 59, report page 55.300 Transcript, Volume 1-CONF, page 190, line 16 to page 191, line 6.301 Exhibit 20514-X0470, UCA Aid to Cross - ATCO Electric Distribution 2015 Draft MSA preliminary

comments, PDF pages 1, 3 and 5; Transcript, Volume 3-CONF, page 416, line 1 to page 420, line 17.


Decision 20514-D02-2019 (June 5, 2019) • 55

The ATCO Utilities’ analysis of the 10-year deal was flawed in that it failed to consider

the benefits that would accrue to the service provider, and that the service provider would have

more to lose than the client by not renewing a contract.304

The ATCO Utilities defended their choice of a 10-year term for the MSAs on the basis of

the governance mechanisms that are in place.305

5.4.1 Commission findings The weight of evidence supports that 10-year terms for IT service contracts were atypical

at the time the MSAs were negotiated and that a term of this length should have been associated

with lower prices. While there is evidence that the length of the term

there is no compelling evidence that lower MSA prices were obtained.

These considerations raise significant doubt as to whether the MSAs are at FMV. Furthermore,

the Commission is not satisfied that any risks associated with the 10-year term were mitigated by

the other terms and conditions of the MSAs, as asserted by the ATCO Utilities.

5.4.1.1 Ten-year IT contracts were market outliers The evidence before the Commission from the ATCO Utilities and their independent

experts supports that 10-year IT service contracts were market outliers at the time the MSAs

were negotiated.

While Gartner and KPMG submitted that there are numerous outsourcing deals in the

marketplace with similar terms and volumes,307 no evidence was provided of any

contemporaneous, comparator deals that matched the duration of the MSAs (that is, deals of

similar duration with similar start and end dates). Rather, the evidence was to the contrary.

302 Exhibit 20514-X0110.21-CONF, PDF page 2 and Transcript, Volume 1-CONF, page 192, line 9 to page 193,

line 8. 303 Exhibit 20514-X0494, UCA final argument, paragraph 58(a). Exhibit 20514-X0302, ATCO-UCA-CONF-

2017DEC19-004(b) Attachment, PDF pages 9-10.

304 Exhibit 20514-X0494, UCA argument, paragraph 89(a).305 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraphs 88-96.306 Transcript, Volume 4-CONF, page 626, lines 3-6.307 Exhibit 20514-X0441-CONF, KPMG rebuttal evidence, PDF page 18; and Exhibit 20514-X0440, Gartner

rebuttal evidence, PDF pages 18-19. 308 Transcript, Volume 3-CONF, page 416, lines 1-24.


Decision 20514-D02-2019 (June 5, 2019) • 56

The evidence given by Mr. French was to similar effect:

Now, in the time frame of this agreement, there were -- there were a number of deals in

the marketplace in the seven-, eight-, nine-, ten-year time frame let [sic] between 2013

and 2014. So from a scope and scale perspective, the work being done and the volumes of

the work being done, this contract is not atypical. Ten years is probably the longest

agreement that I've seen in my experience. So I would say it's longer than most from that

perspective.312

5.4.1.2 No persuasive evidence of avoided risk and cost or of cost savings achieved The ATCO Utilities argued that the 10-year term was justified based on avoided

transition cost and risk, and cost savings achieved through scale.

In Section 5.1.1.1, the Commission found that the ATCO Utilities failed to provide

cogent evidence of the alleged transition risks and costs. The evidence likewise fails to

demonstrate achievement of the cost savings reasonably expected of transactions associated with

the scale/volume, duration and other characteristics of the MSAs.

309 Transcript, Volume 1, page 129, lines 3-10.310 Transcript, Volume 1, page 72, lines 16-23.311 Transcript, Volume 1, page 73, lines 9-21.312 Transcript, Volume 1, page 117, lines 1-9.


Decision 20514-D02-2019 (June 5, 2019) • 57

313 “Wipro’s press release on the transaction, indicated that it could justify the upfront purchase price for I-Tek based on the revenues underwritten by the MSAs; and,”314

There was no similarly clear evidence that MSA price reductions were achieved

commensurate with the 10-year term, notwithstanding the evidence of Mr. French, Mr. Klawitter

and PAC that longer contract terms are generally associated with lower prices; and,

It is acknowledged that the ATCO Utilities relied, in part, on the KPMG price assessment

and the Gartner benchmark

However, in Section 5.2, the Commission explained that due to a lack of visibility into,

among other things, the selection of comparator contracts, the normalization processes employed

and some of the other details of the analyses performed, it is not apparent whether or how

Gartner, through its normalizations, or KPMG, through its final report, accounted for the term of

the contracts in their respective price analyses. As previously stated, this significantly

compromises the extent to which either of these reports supports the assertions of the ATCO

Utilities and may be reasonably relied upon as evidence that the MSAs are at FMV.

5.4.1.3 No compelling evidence of risk mitigation The ATCO Utilities emphasized that under the MSAs,

While the Commission accepts the evidence highlighted by the ATCO Utilities, the

extent to which it supports the ATCO Utilities’ argument is diminished

The ATCO Utilities further argued that any risks associated with the 10-year term were

mitigated by the governance provisions in the MSAs. For the reasons discussed in the following

section, the evidence fails to support this assertion.

313 Exhibit 20514-X0110.21-CONF, PDF page 2, whereby KPMG acknowledged

314 Exhibit 20514-X0494, UCA final argument, paragraph 58(a).315 Exhibit 20514-X0302-CONF, ATCO-UCA-CONF-2017DEC19-004(b) Attachment, PDF pages 9-10.316 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 90.


Decision 20514-D02-2019 (June 5, 2019) • 58

5.5 MSA governance provisions Views of the ATCO Utilities

The ATCO Utilities engaged KPMG at the outset of the MSA negotiations to provide it

with “a starting point set of commercial terms and conditions that reflected leading market

practices.”317 At the conclusion of the MSA negotiation, KPMG determined that the IT MSA

pricing and commercial terms “reflected leading market practices.”318

The MSAs contain appropriate governance provisions to the benefit of ratepayers.321 The

extensive governance process detailed in the MSAs led to the establishment of numerous joint

committees with membership from ATCO, the ATCO Utilities, as well as Wipro, and there is no

basis for Calgary’s speculation that the ATCO Utilities have not or will not properly manage the

MSAs in accordance with these extensive governance provisions.322

In response to Calgary’s specific argument that the ATCO Utilities are not exercising proper governance because

317 Exhibit 20514-X0037-CONF, PDF page 26, AP-AUC-CONF-2015FEB03-91(b) Attachment.318 Exhibit 20514-X0037-CONF, PDF page 26, AP-AUC-CONF-2015FEB03-91(b) Attachment.319 Transcript, Volume 6-CONF, page 962, lines 13-17.320 Exhibit 20514-X0124-CONF, page 18.321 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraph 239.322 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 256.323 Transcript, Volume 5-CONF, page 825, lines 2-7.324 Transcript, Volume 3-CONF, page 481, lines 9-17; and Exhibit 20514-X0497-CONF, ATCO Utilities reply

argument, paragraph 259. 325 Exhibit 20514-X0497-CONF, ATCO Utilities reply argument, paragraph 259.


Decision 20514-D02-2019 (June 5, 2019) • 59

Views of Calgary It is questionable whether the ATCO Utilities have acted prudently in governance

matters. The following specific issues exist with respect to IT governance:

326 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 257.327 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 258.328 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 277.329 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 277.330 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 278-280, and Transcript, Volume 5-CONF,

page 737, lines 6-25.


Decision 20514-D02-2019 (June 5, 2019) • 60

Customers have therefore not benefitted from the MSA governance mechanisms

designed to maintain FMV over the term of the contracts.331

5.5.1 Commission findings The ATCO Utilities have failed to establish that any risks associated with the 10-year

term of the MSAs have been mitigated by the governance provisions in the MSAs.

The Commission is satisfied that the MSA governance provisions highlighted by Calgary

were “in line with” industry standard and asserted by KPMG

and Gartner.

In the following exchange, Mr. Zadko further explained:

Such action would have been

consistent with the time value of money, which would favour a current period of lower cost/

higher volume over a subsequent period of higher cost/lower volume.

331 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 274-281.332 Transcript, Volume 3-CONF, page 481, lines 9-17.333 Transcript, Volume 3-CONF, pages 479-480, starting at line 15 and ending at line 5.


Decision 20514-D02-2019 (June 5, 2019) • 61

The Commission is likewise concerned about the ATCO Utilities’ approach

The governance provisions discussed above have the potential to provide for and ensure

competitive pricing over time. However, that is so only if they are exercised by the ATCO

Utilities in a timely, reasonable and prudent manner. For all of the reasons discussed, the

Commission is not satisfied that the ATCO Utilities have done so. Accordingly, the Commission

cannot reasonably accept that these governance provisions offer some assurance that the MSA

rates are at FMV and would result in just and reasonable rates if included in revenue

334 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 277.335 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 278.336 Transcript, Volume 5-CONF, pages 737-738, starting at line 18 and ending at line 9.


Decision 20514-D02-2019 (June 5, 2019) • 62

requirement. For the same reason, the Commission is not satisfied that any risks associated with

the 10-year term have been effectively mitigated through these governance provisions.

6 Adjustments to IT MSA service rates

Views of Calgary The ATCO Utilities have failed to demonstrate the prudence of their actions, that MSA

pricing is at FMV, and that inclusion of the claimed IT service costs in revenue requirement

would result in just and reasonable rates. Accordingly, adjustments to MSA prices are warranted.

PAC assessed the MSA prices and made recommendations for adjustments for

consideration by the Commission. These include reductions to initial year (2015) prices

reductions on a “stand-alone” basis, a FMV assessment based upon bids actually made in Project

Phoenix, and glide path adjustments to the actual MSA prices that reflect the tethering of 2015

Wipro prices to ATCO I-Tek prices.

In PAC’s view, its recommendations are supported by the evidence, which, among other things, demonstrated that:

337 Exhibit 20514-X403-CONF, PAC evidence, PDF page 51.338 Exhibit 20514-X403-CONF, PAC evidence, PDF page 17.339 Exhibit 20514-X403-CONF, PAC evidence, PDF page 65.340 Exhibit 20514-X403-CONF, PAC evidence, PDF page 54.


Decision 20514-D02-2019 (June 5, 2019) • 63

Based on PAC’s recommendations, Calgary presented five options to assist the Commission in determining price adjustments to the MSAs. Although the fourth option was its

preferred option, Calgary viewed all five options as reasonable, conservative, and based on the

evidence. The table below summarizes the recommended adjustments and expected outcomes

associated with each of the options:

Table 1. Calgary recommended price and glide path adjustments

Adjustment Outcome or effect

Option 1 - Shared Services / Least Cost Alternative

For both Managed Services and Project Services

Initial year prices (2015)

Reduce the Wipro MSA prices to I-Tek prices, less to reflect a removal of the equivalent of the I-Tek margin.

Shifts Wipro MSA curve down , in a parallel fashion.

Glide path (2016 to 2024)

Use the overall average glide path used for I-Tek, as

directed by the AUC in Decision 2014-169 (Errata).

Down-shifts Wipro MSA curve then slightly steepens to reflect change from the

Wipro average glide path to the I-Tek overall average glide path.

Option 2 - FMV proxy #1

For both Managed Services and Project Services


Reduce the Wipro MSA prices by , the percentage

difference between Wipro and bids.

Shifts Wipro MSA curve down in parallel fashion to replicate the first-year level.


Down-shifts Wipro MSA curve then steepens to reflect change from

Option 3 - FMV proxy #2


Reduce the Wipro MSA


Down-shifts Wipro MSA curves

Option 4 – stand-alone proxy


Reduce the Wipro MSA prices for Managed Services to remove the impact of the I-Tek purchase price, less net assets.

Each year is reduced

Shifts Wipro MSA curve for Managed Services down each year, to remove the impact of the I-Tek purchase price, less net assets. Shifts Wipro MSA curve for Project Services down

341 Exhibit 20514-X403-CONF, PAC evidence, PDF page 86.


Decision 20514-D02-2019 (June 5, 2019) • 64

Adjustment Outcome or effect

Reduce Wipro MSA prices for Project Services to reflect prices offered by competitors.


Use the Managed Services average glide path of recommended by PAC. Use the Project Services average glide path ofrecommended by PAC.

Down-shifts Wipro MSA for Managed Services curve then steepens to reflect

Option 5 - Hybrid – Sale plusPrudent Sourcing


Reduce the Wipro MSA prices for Managed Services by to remove the impact of the I-Tek purchase price, less net assets. Each year is reduced by

Reduce Wipro MSA prices for Project Services by to reflect prices offered by competitors.

Shifts Wipro MSA curve for Managed Services down

Shifts Wipro MSA curve for Project Services down


Use the Managed Services average glide path of recommended by PAC. Use the Project Services average glide path of recommended by PAC.

Down-shifts Wipro MSA for Managed Services curve then steepens to reflect

Source: Exhibit 20514-X0401-CONF, Calgary evidence, tables 1-5.

342 Exhibit 20514-X0469-CONF, Correction to FMV benchmark range table.343 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 65.


Decision 20514-D02-2019 (June 5, 2019) • 65

Views of the UCA ATCO and the ATCO Utilities have failed to discharge their onus of establishing that the

prices customers will pay under the MSAs will lead to just and reasonable rates. The

Commission should therefore disallow those portions of the rates that have not been justified.

The Commission should adopt Mr. Bell’s recommendation and disallow

Alternatively, the Commission should disallow

In the further

alternative, should the Commission find that FMV is the appropriate test to determine the

reasonableness of the MSA pricing, it should adopt Calgary’s Option 2, which reflects a reasonable assessment of a market price in an unrestricted market.345

Views of the ATCO Utilities

The ATCO Utilities argued that ATCO conducted a competitive bid process for IT

services that resulted in IT rates that are just and reasonable. Both Gartner’s benchmark and KPMG’s price assessment compared the MSA IT rates to actual deals in the marketplace and

concluded that the IT rates were consistent with FMV. Further, the interveners’ assertion that the sale price of ATCO I-Tek was somehow embedded in the negotiated IT rates is contrary to the

findings of KPMG and Gartner, which concluded that IT rates were at FMV. In addition,

Gartner’s rebuttal evidence showed that the MSAs on a TCV basis were at or below market comparables. As a result, the IT rates are just and reasonable and should be approved as filed.

Any adjustment to MSA rates that is in any way related to the sale or value of ATCO

I-Tek results in impermissible cross-subsidization. The ATCO Utilities stated:

As stated in evidence, both the case law and regulatory precedent confirm that any

attempt to use proceeds from an unregulated disposition to offset regulated rates is simply

impermissible.

The ATCO Utilities concluded that:

… any attempt to credit a portion of the proceeds from the disposition of an unregulated

entity; whether directly or indirectly, to reduce utility revenue requirement would

constitute cross-subsidization that is simply impermissible. This issue has been ignored

completely by Interveners in this proceeding; but cannot be ignored by the Commission

in the proper exercise of its decision-making authority and its approval of amounts paid

for the acquisition of required IT services. As stated, the test for utility ratemaking

purposes is and has always been, Fair Market Value. Cross-subsidization and the use of

344 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 64.345 Exhibit 20514-X0494-CONF, UCA argument, paragraph 134, PDF pages 56-57.346 Exhibit 20514-X0491-CONF, ATCO Utilities final argument, paragraph 144.


Decision 20514-D02-2019 (June 5, 2019) • 66

unregulated proceeds to lower utility rates to something less than Fair Market Value is

simply not permitted.347

6.1 Commission findings The Commission has made a number of findings in this decision that led to the

determination that the ATCO Utilities failed to satisfy their onus; that is, to demonstrate that the

inclusion of the MSA costs in revenue requirement would result in just and reasonable rates.

In these circumstances, the Commission may fully disallow recovery of the costs,

approve some portion of the costs, or direct the utility to file additional information in a

compliance filing process.348

No intervener has argued that the Commission should fully disallow the MSA costs, nor

has any party strongly argued for further process. In fact, the UCA submitted that further process

is neither required nor desirable in light of the complexity and already protracted nature of this

proceeding. All interveners argued for a partial disallowance of costs.

The Commission agrees that a partial disallowance of costs is the only reasonable

alternative in the circumstances. This is so not only for the reasons identified by the UCA but

also because the Commission has no reasonable expectation that further process would be of any

assistance.

The substantial duration and regulatory complexity of this proceeding have been largely

influenced by: (i) ATCO’s chosen sourcing strategy; (ii) the paucity of evidence documenting

ATCO’s consideration of the sourcing alternatives available to it or the costs and the potential

price outcomes associated with each of those options (and most particularly, those associated

with obtaining IT services from a provider not required to purchase ATCO I-Tek); and

(iii) ATCO’s decision to run the MSA and the ATCO I-Tek sale processes concurrently

(collectively, the ATCO decisions).

The ATCO decisions have also significantly limited the quality of the evidence on the

record of this proceeding. There is no then-contemporaneous evidence of what the MSA pricing

would have been had ATCO pursued any of the other sourcing options available to it or chosen

not to run the MSA and ATCO I-Tek sale processes simultaneously. Rather, parties have been

left to offer evidence that seeks to artificially disentangle the MSA and ATCO I-Tek sale

processes to discern the likely effect of the sale process on MSA pricing many years after the

fact. This proceeding commenced almost four years ago. Since then, the parties have been able to

garner evidence with limited value. It is unlikely that further process would generate more or

better evidence than that currently available.

The Commission must therefore look to the evidence and exercise its judgment to

identify reasoned adjustments to ensure just and reasonable rates.

6.1.1 Authority for and approach to adjustments An explanation is offered for the adjustments directed by the Commission in the

paragraphs that follow. However, to provide context for that discussion, it is instructive to begin

347 Exhibit 20514-X0491, ATCO Utilities final argument, paragraph 190.348 Decision 20272-D01-2016, paragraph 1099.


Decision 20514-D02-2019 (June 5, 2019) • 67

by reiterating the Commission’s responsibility to set just and reasonable rates and to describe its general approach to doing so in circumstances such as this. As stated in the Evergreen II

decision:

165. In summary, having considered the submissions of all parties, the Commission

finds that it does not possess the jurisdiction required, in the circumstances of this case, to

order the ATCO Utilities to engage in a competitive sourcing process, nor does it have

the ability to dictate terms and conditions of commercial contracts as suggested by the

interveners. The Commission finds that its jurisdiction in this application flows primarily,

though not exclusively, from its mandate to ensure just and reasonable rates, as opposed

to its general supervisory jurisdiction to ensure the safety, integrity, or dependability of

the services provided to ratepayers by the ATCO Utilities.

166. Further, and in light of this finding, the effective performance of the

Commission’s mandate to ensure just and reasonable rates in this case permits it to

engage in an assessment of the ATCO Utilities prudence in negotiating the terms of the

subject IT and CC&B Master Service Agreements, including an evaluation of whether

the prices agreed to for the provision of the identified services were, at the time that they

were negotiated, at or below fair market value. The results of this enquiry will, in turn,

inform the Commission’s assessment of the proportion of the costs incurred through theoperation of the subject Master Service Agreements is properly includable in the utilities’revenue requirements.349

Consistent with the above statements, in conducting its analysis to determine what

portion of the prices paid under the MSAs are disallowed and what portion should be passed on

to ratepayers, the Commission has considered the submissions of the parties; the extensive

volume of evidence in this proceeding; and the Commission’s findings on the prudence of the

actions leading up to the MSAs and whether the MSA prices would result in just and reasonable

rates if included in revenue requirement.

Before discussing the Commission’s analysis, it is necessary to address an argument that received considerable attention in the submissions of all parties.

Both Calgary and the UCA argued for disallowances on the basis that running the MSA

and ATCO I-Tek sale processes concurrently resulted in the MSA prices being higher than they

would have otherwise been. Each of these interveners offered a slightly different approach and a

different view about the amount by which the MSA pricing is overstated as a consequence of the

transaction structure. However, generally speaking, the approach of both interveners was to

focus on the difference between the ATCO I-Tek sale price and the value of ATCO I-Tek’s assets

More specifically, the interveners argued that the large goodwill component of the ATCO

I-Tek sale price, reflected in the difference between the sale price ($204 million) and the value of

349 Decision 2014-169 (Errata), paragraphs 165-166.350 Exhibit 20514-X0483-CONF, R. Bell undertaking response 1.351 See, for example, Exhibit 20514-X0403-CONF, PAC Report, PDF page 50; and Exhibit 20514-X0483-CONF,

R. Bell undertaking response 1.


Decision 20514-D02-2019 (June 5, 2019) • 68

that entity’s assets, was the result of running the MSA and ATCO I-Tek sale processes

concurrently. According to the interveners, this difference between the ATCO I-Tek sale price

and the value of its assets therefore provides a measure of the extent to which the MSA pricing is

overstated. That is, deducting from the MSA pricing the difference between the ATCO I-Tek

sale price and the value of its assets effectively separates the MSA pricing from the unsupported

value attached to the ATCO-I-Tek sale, and allows for a reasonable determination of MSA

pricing on a stand-alone basis.

The ATCO Utilities strenuously objected to the above approach arguing that it would

effectively (and impermissibly) subsidize regulated rates with the proceeds from the sale of an

unregulated entity, contrary to the principles established by the Supreme Court of Canada in the

Stores Block decision.

The Commission will not determine whether the Stores Block principles apply in the

circumstances of this proceeding or make any findings on the ATCO Utilities’ argument. This is because the Commission finds it unnecessary to consider the approach advocated by the

interveners. The Commission is satisfied that reasoned adjustments can be made to ensure just

and reasonable rates by focusing on the extent to which various aspects of the subject

transactions resulted in MSA pricing that is above just and reasonable rates. The Commission

has also considered that despite its deficiencies, the Gartner benchmark nevertheless offers

information that is of some assistance in its determination of adjustments.

6.1.2 Effects of the sourcing strategy and tender/bid process on the MSA pricing In Section 5.1, the Commission found that the ATCO Utilities (or ATCO on behalf of the

ATCO Utilities), failed to act prudently in their consideration of the IT sourcing alternatives

available to them at the time, and that the requirement for the MSA service provider to purchase

ATCO I-Tek served as a restriction on competition; limited the pool of potential bidders

(because it excluded from the process all those interested in bidding only on the MSAs); and,

ultimately, resulted in the MSA prices being higher than they would have otherwise been. Stated

another way, achieving a greater number of bidders would have been accomplished if there had

been no requirement for the MSA service provider to purchase ATCO I-Tek, and more bidders

would have likely resulted in lower MSA pricing.

The Commission also determined earlier that the tender/bid process employed by ATCO

(running the MSA and ATCO I-Tek sale processes simultaneously) had a direct effect on the

MSA pricing, as did directions from ATCO to bidders concerning the desired purchase price for

ATCO I-Tek. The evidence demonstrated that each of these actions likewise resulted in the MSA

pricing being higher than it would have otherwise been.

No evidence was filed by the ATCO Utilities or interveners that clearly and definitively

demonstrates what the MSA pricing would have been absent the concurrent sale of ATCO I-Tek;

that is, had the IT services for the ATCO Utilities been procured on a stand-alone basis from a

provider who was not also required to purchase ATCO I-Tek. As previously stated, the pricing

effect of ATCO’s sourcing strategy and the limitations and restrictions on competition that

resulted from that strategy, as well as the manner in which it was pursued through the tender/bid

process, is obscured by and cannot be specifically determined because of the transaction

structure. It is therefore necessary for the Commission to exercise its judgment to identify

reasoned adjustments to ensure just and reasonable rates.


Decision 20514-D02-2019 (June 5, 2019) • 69

In assessing the extent to which the MSA prices were influenced by the reduced

competitiveness of the MSA process (as a consequence of both the selected sourcing strategy and

the tender/bid process employed), it is reasonable to consider PAC’s evidence contrasting a stand-alone outsourcing deal (one that does not also involve the sale of a business) with the

approach adopted in the subject transactions with Wipro.

Based on its experience, PAC expressed the view that for a deal of the “significant size of the ATCO/Wipro arrangement and given the prevailing market conditions at the time,” a well-managed competitive bidding process for a stand-alone outsourcing deal would have generated

savings in the 10 to 20 per cent range.

The Commission rejects the ATCO Utilities’ argument that no consideration should be given to the are non-binding offers.353 As was previously stated, the

Commission accepts that there was considerable variation in MSA pricing among 354 The Commission further recognizes that bids may involve a

degree of competitive posturing. Nevertheless, the code (which the ATCO Utilities argued is

instructive in this proceeding) expressly identifies that FMV can be tested by a variety of means,

including competitive bids and quotes, such as were provided by

These bids are therefore properly considered in the Commission’s assessment of the extent to which the MSA pricing was influenced by the concurrent sale of ATCO I-Tek.

More specifically, based on TCV (the sum of the MSA expenditures for the baseline

volumes over the 10-year term of the MSAs ,

355 This indicates a large amount of variability in the bids, and in particular,

much lower TCV bids, when a lower value is ascribed to the purchase of ATCO I-Tek. Had the

ATCO I-Tek purchase been removed from the transaction, with a more competitive bidding

process being adopted, the low values of these

Having regard to the available evidence, including the informational value of the

bids as described, and exercising its judgment, the Commission concludes that on average, the

MSA pricing is 10 per cent too high as a consequence of the sourcing strategy chosen and the

tender/bid process employed. A 10 per cent adjustment aligns with PAC’s recommended reduction of 10 to 20 per cent for a well-managed competitive outsourcing process and

As will be discussed below, a 10 per cent adjustment also roughly

352 Exhibit 20514-X0403-CONF, PAC evidence, PDF page 27.353 Exhibit 20514-X0491-CONF, ATCO Utilities argument, paragraphs 128-129.354 See, for example, Exhibit 20514-X0403-CONF, PAC Report, Figure 9 on PDF page 32 and Figure 10 on PDF

page 33. 355 See Exhibit 20514-X0268.53-CONF, AU-AUC-2017AUG30-001(c) Attachment Tab 9-4, Bidder Financial

Analysis, Column “N,” and Exhibit 20514-X0375.03-CONF, ATCO-CAL-

CONF-2018JUN05-026(a) Attachment, Row 29 for Up-Front Purchase Price.


Decision 20514-D02-2019 (June 5, 2019) • 70

aligns with the Commission’s finding that the Gartner benchmark report establishes that the first-

year MSA pricing is

6.1.3 Effect of the on the MSA pricing In Section 5.3.1, the Commission determined that caused the

MSA pricing to be higher than it might have otherwise been for two principal reasons. First, the

Commission is satisfied that at the time the MSAs were negotiated, it was reasonably anticipated

that the ATCO Utilities’ IT volumes would exceed the baseline MSA volumes. These additional volumes should have been included in the MSAs Had the

anticipated higher volumes and IT spend been included in the negotiated MSAs, the MSA

pricing would have been lower.

As previously discussed, the requirement that the MSA IT service provider purchase

ATCO I-Tek had a direct effect on MSA pricing, as did directions from ATCO to bidders

concerning the purchase price for ATCO I-Tek. More specifically, the evidence demonstrated

that each of these actions likely resulted in MSA pricing being higher than it would have

otherwise been. Further, the testimony of Mr. Zadko, quoted at paragraph 261, established a

direct relationship between the sale price for ATCO I-Tek and

In short, coupled

with the directions from ATCO to bidders concerning the purchase price for ATCO I-Tek,

resulted in the MSA pricing being higher than it would have been had the MSAs been negotiated

on a stand-alone basis.

As with the sourcing strategy and the tender/bid process, the effect

on the MSA pricing cannot be quantified with any degree of certainty. However, the

Commission found that the additional ATCO Utilities’ IT volumes that were or could have been reasonably anticipated at the time the MSAs were negotiated, were not insignificant having

regard to the estimated value of and the ATCO Utilities’ actual IT spend over the first three years of the MSAs. In Section 5.3.1, it was noted that:

Also of note is the evidence of

Mr. Zadko,

356 Transcript, Volume 1-CONF, page 200, lines 1-4.357 Based on Exhibit 20514-X0375-CONF, ATCO-CAL CONF 2018JUN05-035 (l) Attachment PDF pages 146-

196. See also in Exhibit 20514-X0344, ATCO-UCA-CONF

2017DEC19-006, Attachment 11, PDF page 189. 358 Transcript, Volume 6-CONF, page 1005, lines 5-15.359 Transcript, Volume 4-CONF, page 582, line 24 and page 583, line 13.


Decision 20514-D02-2019 (June 5, 2019) • 71

It is the Commission’s judgment that the MSA prices would have been lower by as much

as five per cent in the absence of having regard to the totality of the

evidence, including: (i) the additional ATCO Utilities’ IT volumes that were, or could have been reasonably anticipated at the time the MSAs were negotiated; (ii) the importance of IT volumes

to pricing; (iii) the possible size of

and (iv) the evidence demonstrating the

upward pressure on the MSA pricing that resulted from

6.1.4 How the Gartner benchmark assists in the determination of reasonable adjustments

The FMV of the required services is a consideration for the Commission in the

determination of what costs are properly included in revenue requirement.

Earlier, the Commission identified a number of concerns and deficiencies associated with

the Gartner benchmark, including: (i) lack of transparency into the peer comparables; (ii)

inability to examine and test the normalizations and calculations; (iii) failure to demonstrate

consideration of term length or the TCV of the MSAs; (iv) consideration of only the ATCO

Utilities’ volumes rather than total transaction volume; (v) limited transparency into whether and

to what extent Gartner normalized for the purchasing power of sole sourcing; (vi) not including

the reasonably expected volumes and (vii) under-utilization

of offshoring. Certain of these deficiencies resulted in Gartner’s reporting of a higher benchmarked FMV than would have otherwise been the case; other deficiencies more generally

limited the reliability of the report.

Although the Gartner benchmark cannot therefore be reasonably relied upon to establish

that the MSA pricing is at FMV, it nevertheless offers information that is of some assistance to

the Commission in its determination of what adjustments are necessary to result in FMV pricing

for the MSAs.

Both the ATCO Utilities and Gartner asserted that FMV is represented by the average of

the peer group pricing. However, under the code, FMV is defined as the price reached in an open

and unrestricted market between informed and prudent parties, acting at arm’s-length and under

no compulsion to act. Based on this definition, any of the peer group comparators used in the

benchmark can be viewed as FMV. This includes the lower bound of the Gartner benchmark

FMV range for first-year pricing.

For all of the reasons stated above, the Commission considers that the lower bound of the

Gartner benchmark FMV range for first-year pricing, as shown in Table 2, represents a

reasonable starting point for further adjustments.361

360 Transcript, Volume 5-CONF, page 827, lines 2-25 and page 828, lines 1-6.361 Exhibit 20514-X0469-CONF, Correction to FMV benchmark range table.


Decision 20514-D02-2019 (June 5, 2019) • 72

Table 2. Gartner benchmark FMV range

Gartner IT service towers Benchmark FMV

annually Benchmark low

annually Benchmark high

annually

$

Application Management Services

Server Operations

Storage Operations

Data Networks

End User Support

Voice Services

Network Transport

IT Services Desk

Projects

Pass-throughs

Grand total

The lower bound of the Gartner benchmark FMV range

At a minimum, the Gartner benchmark report identifies that the MSA pricing is

overstated by . However, the lower bound of the Gartner benchmark has been

determined without regard for total transaction volume and the reasonably expected volumes

implied by , and without apparent consideration of the TCV and term

length of the MSAs and the purchasing power of sole sourcing. Accordingly, in the

Commission’s judgment, represents the starting point from which further

adjustments are warranted.

6.1.5 Effect of glide path and TCV on the MSA pricing It is the Commission’s judgment that, separate from the effects of the sourcing strategy,

the tender/bid process and discussed above, the MSA glide path does not

result in just and reasonable rates. This is because of the glide path’s failure to account for reasonably expected savings to be achieved through offshore labour arbitrage and automation.

The Commission received recommendations for glide path adjustments from both

Calgary and PAC.


Decision 20514-D02-2019 (June 5, 2019) • 73

The Commission observes that the glide path component of Calgary’s options 4 and 5 is

based on PAC’s evidence. On closer examination, while the information is expressed in a

different way, it does not substantively offer an alternative that is distinct from PAC’s recommendation. As for options 2 and 3, among other things, there is some ambiguity on the

record about whether the average glide path was The

Commission considers that option 1 is of little relevance or assistance as it is based on the glide

path determined in a previous Commission decision in different circumstances.

In view of the foregoing and for all the reasons expressed in Section 5.2, the Commission

is inclined to afford the greatest weight to PAC’s analysis and recommended glide path, subject

to one adjustment. Based on the earlier explanation, the component of PAC’s recommended glide path that is related to the Evergreen II decision should be removed, resulting in a

recommended weighted average glide path over all towers of

6.1.6 Conclusion Taking all of the above into account, the Commission considers that in order to obtain

just and reasonable rates for IT services, adjustments are necessary to the MSA pricing, both in

the first year of the agreement (which also necessarily affects subsequent years as described

below), and to the glide path.

Before describing the specific adjustments required, it is beneficial to offer examples

illustrating the Commission’s approach. If the MSA pricing results in expenditures in the first year of $100 million, and the glide path is minus two per cent per year, the sequence of MSA

expenditures would be:

Year 1: $100 million

Year 2: $100 million x (1-0.02) = $98 million

Year 3: $100 million x (1-0.02)2 = $98 million x (1-0.02) = $96.04 million

Year 4: $100 million x (1-0.02)3 = $98 million x (1-0.02)2 = $96.04 x (1-0.02) =

$94.1192 million

etc.

To achieve a reduction of MSA pricing by 10 per cent, for example, a 10 per cent

reduction would be applied to the first-year pricing. Thereafter, the glide path would apply to this

reduced figure at the same rate, and the above sequence would be replaced by:

362 Exhibit 20514-X0403-CONF, Table 34, PDF page 83, and Table 35, PDF page 85.363 Exhibit 20514-X0403-CONF, Table 34 (see last row - Overall Glidepath Weighted by Tower), PDF page 83.


Decision 20514-D02-2019 (June 5, 2019) • 74

Year 1: $100 million x (1-0.1) = $90 million

Year 2: $90 million x (1-0.02) = $88.2 million

Year 3: $90 million x (1-0.02)2 = $88.2 million x (1-0.02) = $86.436 million

Year 4: $90 million x (1-0.02)3 = $88.2 million x (1-0.02)2 = $86.436 million x (1-0.02) =

$84.70728 million

etc.

As illustrated by the above examples, to achieve a 10 per cent reduction in MSA pricing

over the term (that is, a 10 per cent reduction to MSA pricing as a whole), the Commission need

only consider an adjustment to first-year MSA pricing, because the opening value in each

subsequent year is calculated as the previous year’s value lowered by the reduction incorporated

in the glide path (two per cent in the above example). That is, a reduction to first-year pricing

will necessarily and automatically apply to all subsequent years.

As for the specific adjustments required to the MSA pricing, based on the preceding

analysis, it is the Commission’s judgment that:

(a) As a consequence of the sourcing strategy, the tender/bid process

(b)

(c)

In narrowing that range, the Commission recognizes that the various effects on MSA

pricing discussed in the previous sections and listed above are not necessarily independent. As an

example, to the extent that reduced competition in the tender/bid process resulted in higher MSA

pricing, this factor likely also contributed to the existence and its

effect on increased MSA pricing.

An upward adjustment from figure is likewise warranted in recognition

of the evidence that the lower bound of the Gartner benchmark has been determined without

regard for total transaction volume and the reasonably expected volumes implied by


Decision 20514-D02-2019 (June 5, 2019) • 75

and, without apparent consideration of the TCV and term length of the

MSAs and the purchasing power of sole sourcing.

On balance, having regard to all of the evidence, the Commission considers that a 13 per

cent reduction to first-year MSA pricing is warranted. The Commission also considers it

reasonable to establish the overall glide path at -4.61 per cent, rather than impose specific glide

path targets for each tower. In other words, weighted by the percentage spend for each tower,

prices should decrease by 4.61 per cent on average, in each year.

In summary, to account for the considerations listed above and to achieve just and

reasonable rates, adjustments to the MSA pricing are required. The ATCO Utilities are directed

to apply (i) a reduction of 13 per cent in MSA pricing in year 1 (which automatically flows

through to all subsequent years as in the example shown above); and (ii) a glide path reduction in

MSA pricing of 4.61 per cent (on a weighted average across towers) in each of years 2 through

10.

Because the glide path represents changes to prices relative to those prices in the

preceding year, the Commission’s adjustments can be more specifically described as follows:

(i) In the first year of the MSAs, 2015, where volumes have already been realized,

MSA pricing and therefore IT expenditures are to be reduced by 13 per cent.

Applying a 13 per cent reduction to actual expenditures of results in

year 1 IT expenditures of

(ii) In years 2 through 10 of the MSAs, beginning with the final expenditure amount of

from part (i), impose a glide path that reduces prices on a weighted

average basis across towers by 4.61 per cent each year, where the weights are the

per cent spend by each tower.

The implementation of any adjustments to IT rates for cost-of-service and distribution utilities is

discussed in Section 7 of this decision.

The adjustments determined by the Commission are to the pricing of IT services that the

ATCO Utilities are entitled to recover in rates charged to customers, but will be reflected in

terms of expenditures, where expenditures on IT services are the product of prices and quantities

(approved volumes). For clarity, it is not the Commission’s intention that expenditures on IT services be reduced by the amount of the adjustments, as would result, for example, by simply

reducing volumes with no changes in the prices. Rather, the expenditures recovered in rates on

the approved volumes of IT services are to be reduced by the stated percentage adjustments

relative to what the expenditures would have been under the existing MSA pricing when applied

to those same volumes.

364 Exhibit 20514-X0124, Gartner benchmark report, ATCO Pricing year 1 - 2015, page 16. Also provided as the

value for 2015 in Exhibit 20514-X0480.01 CONF, Undertaking 14 Attachment.


Decision 20514-D02-2019 (June 5, 2019) • 76

7 Rate-setting - Implementation of any adjustment to IT rates for cost-of-service

and distribution utilities

Views of the ATCO Utilities The Commission has already determined how the outcome of this proceeding will be

incorporated into rates, including the distribution utilities’ rates. ATCO Gas and ATCO Electric Distribution will update their going-in rates for the 2018-2022 PBR term to reflect the impact of

the prices approved in this proceeding.365

Calgary is seeking to reopen prior Commission decisions with respect to the treatment of

the glide path in rates under PBR. Specifically, the Commission’s Evergreen II decision proceeding and Decision 22394-D01-2018 demonstrate that Calgary’s position has been

previously addressed by the Commission on a number of occasions. The Commission should

once again reject Calgary’s attempts to uproot the core principles of PBR ratemaking that have been established through multiple proceedings.

Views of Calgary Without proper adjustments being made, excessive ІТ prices for the distribution utilities

going into the second PBR term in 2018 would be maintained, and the benefit of а steeper glide path in years after 2017 would accrue to the distribution utilities, with no benefit to ratepayers.

Calgary submitted:

… it is necessary, as a matter of law, for Customers to be provided glide path savings

after 2017 if those savings arose, or should have arisen (as a matter of prudence), from a

prior period. For clarity, this is the case whether the savings arise from a steeper glide

path as ordered in this Proceeding as a matter of prudence, or arise as provided under the

MSA glide paths actually negotiated by ATCO.

The Commission’s authority to implement PBR type regimes arises only under

legislation, and can only be exercised in lieu of COS [cost-of-service] rate making if the

PBR rates are “intended to result in cost savings or other benefits to be allocated between the owner of the gas utility and its customers.366

Any reductions in the MSA prices ordered by the Commission in this proceeding should

be dealt with as follows:

for the cost-of-service utilities (ATCO Pipelines and ATCO Electric Transmission),

placeholders should be adjusted back to 2015 and carried forward, with carrying

charges applicable at the weighted average cost of capital for each utility; and

for the distribution utilities, the 2018 going-in rates for each utility should be

recalculated by adjusting for O&M [operation and maintenance] and capital-related IT

costs based upon the principles and parameters established in Decision 20414-D01-

2016367 and Decision 22394-D01-2018. In addition, the distribution utilities should be

subject to a further reduction in 2018 going-in rates to reflect the negotiation of savings

365 Exhibit 20514-X0439-CONF, paragraph 257.366 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 291-292.367 Decision 20414-D01-2016 (Errata): 2018-2022 Performance-Based Regulation Plans for Alberta Electric and

Gas Distribution Utilities, Proceeding 20414, February 6, 2017.


Decision 20514-D02-2019 (June 5, 2019) • 77

during the first term of PBR (i.e., in 2015), which are not fully reflected in the rebased

notional revenue requirement because of glide path reductions that kick in after 2017.368

Any potential reductions ordered by the Commission could be reflected at the tower or

service level.369

Given the involvement of ATCO in the Gartner benchmark and final KPMG report,

which were conducted after the Wipro sale was completed, the Commission should order

adjustments to IT rates for the cost-of-service utilities from 2015 onward. Furthermore, any

ordered adjustments would affect the distribution utilities’ costs for 2016 onwards, including 2018 going-in rates.

Views of the UCA As stated by Mr. Bell, the effects of this proceeding on the ATCO utilities that are

regulated under a PBR scheme should be to incorporate disallowances in the going-in rates for

the second generation PBR. These effects should be prospective in nature and be accomplished

by implementing Mr. Bell’s recommended reductions.

Commission findings In Bulletin 2015-11, the Commission identified the possibility that the issues in this

proceeding may have implications for the distribution utilities. In a letter dated August 13, 2015,

the Commission noted the acknowledgement on behalf of the ATCO Utilities that “the PBR Utilities would be bound by the decisions rendered by the Commission [in the IT common

matters proceeding] with respect to the pricing of the services they receive under their respective

IT MSAs, if and when these matters are re-examined for the ATCO PBR Utilities.”370 Treatment

of ATCO Gas and ATCO Electric Distribution IT costs was subsequently considered in Decision

22394-D01-2018, Rebasing for the 2018-2022 PBR Plans for Alberta Electric and Gas

Distribution Utilities in which the Commission approved placeholder treatment of the costs

subject to this proceeding.371 The Commission also notes that Decision 22394-D01-2018 is the

subject of an ongoing review proceeding.372

In the Evergreen II decision, the Commission considered the IT and CC&B prices or

costs to be borne by the ATCO Utilities for 2010-2014, and adjusted pricing on a first-year and

glide path basis. Under cost-of-service regulation, ATCO Pipelines and ATCO Electric

Transmission’s 2010 first-year IT and CC&B costs were adjusted by the Commission.

Subsequent years’ IT and CC&B costs were also adjusted by the Commission to reflect the approved glide path for the term of the IT MSAs between the transmission utilities and ATCO

I-Tek.

The distribution utilities were regulated under cost-of-service regulation until 2012, and

have been operating under PBR since 2013. Similar adjustments to those for ATCO Pipelines

and ATCO Electric Transmission were made to the distribution utilities’ IT and CC&B costs for

the 2010-2012 period. However, the Commission determined that it would not exclude IT and

368 Exhibit 20514-X0492-CONF, Calgary final argument, paragraphs 39-40.369 Exhibit 20514-X0492-CONF, Calgary final argument, paragraph 148.370 Exhibit 20514-X0056, 2015-08-13 AUC letter.371 Decision 22394-D01-2018, paragraph 308.372 Transcript, Volume 3, page 349.


Decision 20514-D02-2019 (June 5, 2019) • 78

CC&B costs from the 2013-2017 PBR term and formula because this would unnecessarily distort

the incentives created by, and be inconsistent with, PBR.373 Accordingly, the Commission did not

require ATCO Gas and ATCO Electric Distribution to apply the glide path approved in the

Evergreen II decision to IT and CC&B costs beyond 2012. The glide paths approved in the

Evergreen II decision only applied to the 2013-2017 PBR term in as much as they affected the

2012 going-in rates.

The Commission continues to be of the view that rates during the PBR term do not need

to be adjusted to reflect approved IT costs for the distribution utilities. Therefore, the

Commission will only direct the distribution utilities to incorporate the findings of this decision

for the purposes of recalculating 2018 going-in rates, and will not require the distribution utilities

to incorporate the further reduction argued by Calgary.

In Decision 20414-D01-2016 (Errata), the Commission determined that rebasing for the

2018-2022 PBR term would occur on the basis of the notional 2017 revenue requirement. The

Commission determined that the O&M portion of that revenue requirement would be based on

the lowest O&M cost year from 2013 to 2016, and that the capital portion would be the actual

approved costs for capital tracker projects and the 2013-2016 average for non-capital tracker

projects.

As noted above, in Decision 22394-D01-2018 the Commission directed ATCO Gas and

ATCO Electric Distribution to use placeholders for IT costs for the purposes of setting 2018

going-in rates for the 2018-2022 PBR term:

309. Therefore, the Commission directs the ATCO Utilities to maintain placeholder

treatment for the common group cost allocation and pension costs in the calculation of

their respective notional 2017 revenue requirement and base K-bar. The Commission

further directs the ATCO Utilities to update their respective 2016 actual O&M costs, as

well as any associated capital costs to reflect the outcome of the compliance filings to

Decision 21701-D01-2017[374] and Decision 21831-D01-2017.[375] Following the

finalization of the common group cost allocation costs, IT common costs and pension

costs, the ATCO Utilities are directed to update their respective notional 2017 revenue

requirement and 2018 base K-bar calculations.

The Commission directs ATCO Gas and ATCO Electric Distribution to reflect the

Commission’s disallowance in Section 6 of this decision in the recalculation of their notional

2017 revenue requirement and 2018 base K-bar, taking into consideration any impact of the

disallowance on O&M, capital and indirect capital (including capital tracker capital and non-

capital tracker capital, as applicable). ATCO Gas and ATCO Electric Distribution are directed to

file compliance filings to this decision reflecting the impact of this decision as part of their next

annual PBR filings.

The O&M and non-capital tracker capital components of the notional 2017 revenue

requirement are not affected by 2017 costs because the notional revenue requirement is based on

the lowest O&M cost year during 2013-2016 for O&M and the 2013-2016 average of non

373 Decision 2014-169, paragraph 460.374 Decision 21701-D01-2017: ATCO Electric Ltd., Transmission Common Group Application, Proceeding 21701,

July 4, 2017. 375 Decision 21831-D01-2017: ATCO Utilities (ATCO Gas and Pipelines Ltd., and ATCO Electric Ltd.), 2014-

2018 Pension Application, Proceeding 21831, July 12, 2017.


Decision 20514-D02-2019 (June 5, 2019) • 79

capital-tracker capital. Therefore, the distribution utilities’ notional 2017 revenue requirement

should incorporate the impact of the 2015 disallowance and approved glide path to calculate the

2016 O&M and 2015 and 2016 non-capital tracker capital as determined in Section 6. Because

the capital tracker capital component of the notional 2017 revenue requirement is affected by

2017 costs, the distribution utilities’ notional 2017 revenue requirement related to capital trackercapital and the 2018 base K-bar should incorporate the first year disallowance in 2015, and the

Commission-directed glide path reduction as determined in Section 6 for 2016 and 2017.

ATCO Gas and ATCO Electric Distribution are further directed to show the

disallowances calculations and clearly show the directed IT disallowance on an annual basis by

capital, indirect capital, and O&M in the applicable rebasing and K-bar schedules in their next

annual PBR filings. The distribution utilities should also demonstrate that the first-year

disallowance in 2015 does not affect the determination of the lowest O&M cost year and, if it

does, they should adjust the notional 2017 revenue requirement accordingly to reflect a different

lowest O&M cost year.

Similar to the IT and CC&B disallowance determined in the Evergreen II decision and

related compliance filings, ATCO Pipelines and ATCO Electric Transmission will apply a

first-year disallowance for 2015 and a glide path reduction as set out in Section 6. ATCO

Pipelines and ATCO Electric Transmission are directed to file their compliance applications to

this decision in the compliance filings to their ongoing GRA/GTAs, clearly showing the directed

IT disallowance on an annual basis by capital, indirect capital and O&M.

8 Order

It is hereby ordered that:

(1) ATCO Pipelines and ATCO Electric Transmission shall incorporate the Commission-

determined reduction of 13 per cent to the first year of the master services agreements,

2015, and apply a glide path that reduces prices on a weighted average basis across

towers by 4.61 per cent in each of years 2 through 10 of the master services agreements,

as approved by the Commission.

(2) ATCO Gas and ATCO Electric Distribution shall incorporate the Commission-

determined reduction of 13 per cent to the first year of the master services agreements,

2015, and apply a glide path that reduces prices on a weighted average basis across

towers by 4.61 per cent for the purposes of recalculating their notional 2017 revenue

requirement and base K-bar.

(3) ATCO Pipelines and ATCO Electric Transmission are to file their compliance

applications to this decision in the compliance filings to their ongoing general rate

applications or general tariff applications.

(4) ATCO Gas and ATCO Electric Distribution are to file their compliance applications to

this decision in their next annual performance-based regulation filings.


Decision 20514-D02-2019 (June 5, 2019) • 80

Dated on June 5, 2019.


(original signed by)

Anne Michaud

Vice-Chair


Carolyn Hutniak

Commission Member


Bill Lyttle

Acting Commission Member


Decision 20514-D02-2019 (June 5, 2019) • 81

Appendix 1 – Proceeding participants

(return to text)

Name of organization (abbreviation) Company name of counsel or representative

ATCO Gas and Pipelines Ltd. ATCO Electric Ltd.

Bennett Jones LLP

Alberta Direct Connect Consumers’ Association Ackroyd LLP

AltaLink Management Ltd.

Canadian Association of Petroleum Producers

Cenovus Energy Inc.

The City of Calgary (Calgary) McLennan Ross Solicitors & Barristers

Consumers’ Coalition of Alberta (CCA)

Encana Corporation

Industrial Power Consumers Association of Alberta Norton Rose Fulbright LLP

Nexen Marketing

NOVA Gas Transmission Ltd.

Office of the Utilities Consumer Advocate (UCA) Norton Rose Fulbright LLP


Decision 20514-D02-2019 (June 5, 2019) • 82


Commission panel A. Michaud, Vice-ChairC. Hutniak, Commission MemberB. Lyttle, Acting Commission Member

Commission staff K. Kellgren (Commission counsel)D. Reese (Commission counsel)M. McJannetC. BurtA. CorsiM. Kopp-van EgterenD. RyanD. Ward


Decision 20514-D02-2019 (June 5, 2019) • 83

Appendix 2 – Oral hearing – registered appearances

Name of organization (abbreviation) Name of counsel or representative

Witnesses

ATCO Utilities (ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd.) Bennett Jones LLP

C. French, Gartner Inc.J. Klawitter, KPMG LLP

ATCO Panel M. BayleyM. HendsbeeD. Zadko

The City of Calgary (Calgary) McLennan Ross Solicitors & Barristers

G. Edeson, PA ConsultingJ. Nicolaou, PA ConsultingH. Johnson, Stephen Johnson CharteredAccountantsG. Matwichuk, Stephen Johnson CharteredAccountants

Consumers’ Coalition of Alberta (CCA)

Office of the Utilities Consumers Advocate (UCA) Norton Rose Fulbright LLP

R. Bell, Russ Bell & Associates Inc.


Decision 20514-D02-2019 (June 5, 2019) • 84

Appendix 3 – Finalized issues list

(return to text)

1. Assessment of IT rates contained in the subject MSAs in comparison to fair market value

(FMV) and the least cost alternative:

(a) Statement of work and base rates

(b) Price validation – initial year price competitiveness

(c) Annual glide path

(d) Benchmarking and price adjustments

(e) Comparison to predecessor MSAs between utilities and ATCO I-Tek

(f) Impact of total contract value, risk allocation, and term on IT rates

(g) Identification of towers, service unit rates, and FMV of individual rates compared to

towers

(h) Any forecast volumes impact on rates

(i) Impact on rates and volumes of the Sale of I-Tek to Wipro

(j) Impact of global sourcing and pricing on IT rates

(k) Testing IT rates and pricing for new Wipro services added after 2015/2016

(l) Impact of proposed system and architecture changes to ATCO IT applications and

infrastructure on IT pricing

2. Sourcing strategy and review undertaken by the ATCO Utilities prior to execution of 10-year

MSAs with Wipro:

(a) Sourcing strategy

(b) Competitive bid process for the provision of IT services

(c) Criteria used to evaluate bidders for the provision of IT services

(d) Business case and consideration of alternatives

(e) Conduct of MSA negotiations with Wipro

3. Structure and operation of MSAs:

(a) Benchmark provisions, reopener provisions, penalty and termination provisions

(b) Impact of IT volume increases or decreases on IT rates

(c) Cost of living adjustments for labour

(d) Unit rates for work, projects, or statement of work above forecast

(e) Pricing and term comparison to industry standard or trend for IT MSAs

(f) IT governance of services provided by Wipro

(g) Specific IT towers being utilized by each utility

(h) Specific contractual clauses related to service level credits, change orders

(i) Ownership of IT intellectual property and licensing rights

(j) Other provisions contained within the MSAs that arise during the course of the

proceeding

(k) Impact of total contract value and term on MSA terms and conditions


Decision 20514-D02-2019 (June 5, 2019) • 85

Appendix 4 – Motions and procedural rulings

(return to text)

The following paragraphs provide an overview of the process steps, motions and rulings

that occurred over the course of this proceeding, up to and including filing of reply argument.

Footnoted exhibits generally refer to public exhibits that can be found in the Commission’s eFiling System, except where specifically noted.

On June 4, 2015, the Commission issued Bulletin 2015-11 initiating the ATCO Utilities

information technology (IT) common matters proceeding (Proceeding 20514) to examine IT

costs related to the master services agreements between the ATCO Utilities and Wipro.1 The

bulletin included a preliminary issues list and directed the ATCO Utilities to file certain

information related to IT costs from proceedings 3577 and 20272 onto the record of Proceeding

20514.

On June 8, 2015, the Commission issued a ruling extending the confidential treatment of

information previously granted in proceeding 3577 and 20272 to this proceeding.2

In correspondence dated August 13, 2015, the Commission amended the preliminary

issues list in response to submissions from parties, determined that ATCO Gas and ATCO

Electric Distribution were not required to participate in the proceeding, denied Calgary’s request for eligibility to claim cost recovery, and established a process schedule for this proceeding.3

However, on September 9, 2015, the Commission suspended the process schedule4 to allow

comments on Calgary5 and the UCA6 motions for further and better IR responses, pertaining to

IR responses that had been migrated to this proceeding from Proceeding 3577.7

In accordance with the schedule set in the Commission’s correspondence to address the motions, ATCO Pipelines responded to the motions on September 9, 2015.8 Replies were filed

by the UCA and Calgary on September 20, 2015,9 and September 21, 2015,10 respectively. On

October 22, 2015, the Commission granted the motions from Calgary and the UCA and directed

that the ATCO Utilities file further responses in accordance with the rulings.11 A portion of the

responses were subject to a prior confidentiality ruling.

On October 23, 2015, the ATCO Utilities filed correspondence requesting an extension to

the deadline to file further IR responses and to advise that a full benchmark of the MSAs was

1 Exhibit 20514-X0027, Bulletin 2015-11, Initiating the ATCO Utilities information technology (IT) common

matters proceeding to examine IT costs related to the master services agreements (MSAs) between the ATCO

Utilities and Wipro Solutions Canada Limited (Wipro). 2 Exhibit 20514-X0036, AUC letter – Ruling on confidential treatment of information.3 Exhibit 20514-X0056, AUC letter - Process schedule and issues list. 4 Exhibit 20514-X0087, AUC letter - Suspension of process schedule to address motions. 5 The Calgary motion was filed on September 8, 2015, in exhibits 20514-X0082 and 20514-X0083. 6 The UCA motion was filed on September 9, 2015, in exhibits 20514-X0085 and 20514-X0086. 7 Migrated IR responses were filed by ATCO Pipelines on June 25, 2015, in response to the Commission’s

direction in Bulletin 2015-111, as exhibits 20514-X0035 to 20514-X0038. 8 Exhibit 20514-X0088. 9 Exhibits 20514-X0092 and 20514-X0093. 10 Exhibit 20514-X0094. 11 Exhibits 20514-X0095 to 20514-X0097, 2015-10-22 AUC letter - AUC ruling on motions of Calgary and the

UCA with appendices 1 and 2.


Decision 20514-D02-2019 (June 5, 2019) • 86

being undertaken, which the ATCO Utilities intended to file as supplemental evidence in this

proceeding within six months.12 On November 6, 2015, the Commission granted the request for

an extension to file further IR responses, such that responses were due on November 13, 2015.13

The ATCO Utilities filed additional responses in accordance with the revised deadline.14

The Commission issued correspondence on October 26, 2015, requesting comments from

other parties on the ATCO Utilities’ request to file supplemental evidence and suspend the

process schedule.15 Calgary filed a request on October 30, 2015, requesting an extension to the

deadline to file comments,16 which the Commission granted on November 2, 2015.17 On

November 4, 2015, the Commission suspended the process schedule to allow comments on the

ATCO Utilities’ proposal to file a benchmark report.18 Calgary19 and the UCA20 filed comments

on the ATCO Utilities’ request on November 16, 2015. The ATCO Utilities filed correspondence on November 18, 2015, requesting the right to reply and simultaneously file reply comments.21

The process schedule suspension was confirmed in Commission correspondence issued

November 19, 2015,22 wherein the Commission directed the ATCO Utilities to provide an update

on the proposed benchmark report by April 21, 2016. Following several status updates,23 the

ATCO Utilities filed a benchmark report authored by Gartner on January 19, 2017,24 with a

request for confidential treatment of the unredacted benchmark report.25 Following a process of

comments and reply from parties,26 the Commission granted confidential treatment to the

unredacted benchmark report on February 15, 2017.27

On February 27, 2017, given the extensive delay with the application and complex

confidential and public record, the Commission directed the ATCO Utilities to file a summary of

the application and requested approvals for each utility.28 The ATCO Utilities filed a summary

on March 3, 2017.29

12 Exhibit 20514-X0098. 13 Exhibit 20514-X0109. 14 Exhibit 20514-X0110. 15 Exhibit 20514-X0099, 2015-10-26 AUC letter - Request for extension and proposed suspension of process

schedule. 16 Exhibit 20514-X0102, ID 20514 Calgary request for extension of reply submissions date. 17 Exhibit 20514-X0103, AUC letter - The City of Calgary's request for an extension of time to file comments. 18 Exhibit 20514-X0104, AUC letter - Suspension of process schedule. 19 Exhibits 20514-X0111 and 20514-X0112, ID 20514 City of Calgary submissions on ATCO benchmark. 20 Exhibit 20514-X0113, UCA Submission on Schedule Suspension Request by AU. 21 Exhibit 20514-X0114, 2015-11-18 - AU Letter to the AUC. 22 Exhibit 20514-X0115, AUC letter - ATCO Utilities' proposal to suspend the current process schedule. 23 Status updates were provided on April 19, 2016, August 25, 2016, and November 9, 2016, filed as exhibits

20514-X0116, 20514-X0122 and 20514-X0123, respectively. 24 Exhibit 20514-X0124. 25 Exhibit 20514-X0126. 26 Calgary and the UCA provided comments on the confidentiality motion on January 27, 2017, found in exhibits

20514-X0128 and 20514-X0129, respectively. ATCO Utilities replied on January 30, 2017, filed as Exhibit

20514-0130. 27 Exhibit 20514-X0131, AUC letter - Commission ruling on the ATCO Utilities’ confidentiality motion.28 Exhibit 20514-X0154, AUC letter - Additional information required. 29 Exhibits 20514-X0155 to 20514-X0157.


Decision 20514-D02-2019 (June 5, 2019) • 87

On March 7, 2017, the Commission suspended the process schedule30 to address a motion

from Calgary,31 supported by the UCA,32 asserting that the ATCO Utilities had not complied with

the Commission direction to file certain additional information. Following submissions from

parties, including cross-references from the ATCO Utilities to certain requested information and

the filing of additional redacted information,33 the Commission issued its ruling on March 17,

2017, directing the ATCO Utilities to comply with the Commission’s cross-reference summary

direction and to file IT volumes for ATCO Gas and ATCO Electric Distribution.34 Redactions of

information that was filed entirely on the confidential record were filed on the public record by

the ATCO Utilities on March 22, 2017,35 and the ATCO Utilities’ cross-reference document and

summary of volumes including the distribution utilities was filed on March 23, 2017,36 as

directed by the Commission.

A first round of IRs to the ATCO Utilities was filed on March 31, 2017.37 The

Commission granted the ATCO Utilities two requests for time extensions to provide IR

responses,38 and the ATCO Utilities filed their responses on June 1, 2017.39

Calgary and the UCA filed motions on June 13, 2017,40 and June 14, 2017,41 respectively,

requesting that the ATCO Utilities be directed to file further and better IR responses and, in the

UCA motion, that some of the ATCO Utilities’ evidence be struck from the record. In

accordance with the schedule set out by the Commission,42 responses were received from the

ATCO Utilities,43 followed by reply from the UCA only.44 Additional responses to the UCA

reply were filed by the ATCO Utilities.45 Although the responses were followed by sur-reply and

additional UCA comments,46 the Commission ruled that they be disregarded.47 The Commission

issued its ruling on July 20, 2017, denying the request to strike the Gartner report from the record

and directing the ATCO Utilities to file more complete responses to certain IRs.48

30 Exhibit 20514-X0165, AUC letter - Suspension of process schedule to address motion from The City of

Calgary. 31 Exhibit 20514-X0158, ID 20514 Calgary letter re ATCO March 3rd filings. 32 Exhibit 20514-X0164, LT AUC ID 20514 re Calgary request undertakings and housekeeping. 33 The ATCO Utilities’ response can be found in Exhibit 20514-X0166, and Calgary’s reply can be found in

exhibits 20514-X0168 and 20514-X0169. 34 Exhibit 20514-X0170, AUC letter - Ruling on the motion from the City of Calgary and revised process

schedule. 35 Redacted responses to public IRs can be found in exhibits 20514-X0171 to 20514-X0174, and redacted

responses to confidential IRs can be found in exhibits 20514-X0221 to 20514-X0224. 36 Exhibits 20514-X0176 and 20514-X0177. 37 Public IR responses were provided in exhibits 20514-X0200 to 20514-X0202. 38 Exhibits 20514-X0193 and 20514-X196. 39 Public IR responses were provided in exhibits 20514-X0200 to 20514-X0202. 40 Exhibits 20514-X0204 and 20514-X0205, Calgary Letter ID 20514 re Motion to Compel. 41 Exhibits 20514-X0207 and 20514-X0208, Redacted UCA Motion re June 2017 IR responses. 42 The process schedule to address the motions was issued on June 15, 2017, in Exhibit 20514-X0210. The

schedule was amended on June 21, 2017, in response to an ATCO Utilities’ request. The amended schedule can be found in Exhibit 20514-X0212.

43 Exhibits 20514-X0213 and 20514-X0214. 44 Exhibits 20514-X0215 and 20514-X0216. 45 Exhibit 20514-X0217, ATCO Utilities Correspondence re UCA Motion. 46 Exhibit 20514-X0218, UCA LT AUC re ATCO Sur-Reply. 47 Exhibit 20514-X0219, AUC letter - Process to address motions for further and better responses to IRs. 48 The Commission considered both motions simultaneously and issued one ruling to address both motions, in

Exhibit 20514-X0226, with separate appendixes. The appendix on the Calgary motion can be found in Exhibit

20514-X0227, and the appendix on the UCA motion can be found in Exhibit 20514-X0228.


Decision 20514-D02-2019 (June 5, 2019) • 88

The ATCO Utilities requested a review and variance (R&V) of the ruling on the motions

for further and better responses to IRs, on July 26, 2017,49 which was amended on August 1,

2017,50 at the direction of the Commission so that the request met requirements under

sections 4(c) and (e) of Rule 016.51 52 The Commission issued Decision 20514-D01-2017 on

August 18, 2017, dismissing the R&V.53 On the same date, the Commission issued concurrent

letters. The first letter relieved the ATCO Utilities of the duty to provide the directed

information, namely pertaining to the sale of ATCO I-Tek to Wipro.54 The second letter was

issued under the Commission’s authority under Section 87 of the Public Utilities Act and

directed ATCO to comply with the attached Commission’s Notice to Produce Documents and Records for Commission examination of the relevance of the information to this proceeding.55

In the course of the consideration and completion of the previous process steps, round 2

IRs were submitted on August 30, 2017,56 and responses were filed on September 28, 2017,57

with additional confidential responses filed on October 12, 2017.58 The UCA and Calgary filed

motions for further and better IR responses on October 10, 2017,59 and October 11, 2017,60

respectively. Following receipt of comments from parties,61 the Commission issued rulings on

November 7, 2017.62 In response to the Commission’s direction, and in accordance with the granted extension request, the ATCO Utilities filed additional responses on December 5, 2017.63

On December 19, 2017, IRs were submitted on the confidential record on the information

filed by ATCO on the sale of ATCO I-Tek.64 Responses were filed on March 16, 2018.65 Motions

for further and better IR responses were filed by the UCA66 and Calgary67 on March 27, 2018,

49 Exhibits 20514-X0230 and 20514-X0231, Application to Review and Vary Motion Ruling - July 26, 2017. 50 The amended request for R&V can be found in exhibits 20514-X0232 to 20514-X0234. 51 Rule 016: Review of Commission Decisions. 52 The Commission’s correspondence directing that the R&V be amended was filed as Exhibit 20514-X0231.53 Decision 20514-D01-2017: The ATCO Utilities (ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd.),

Information Technology (IT) Common Matters Proceeding Application for Review and Variance of the

Commission’s July 20, 2017 Ruling, Proceeding 20514, August 18, 2017. See also Exhibit 20514-X0241, AUC

letter – Relieving the ATCO Utilities from the obligation to provide the directed information.54 Exhibit 20514-X0241, AUC letter – Relieving the ATCO Utilities from the obligation to provide the directed

information. 55 Exhibit 20514-X0243, AUC letter - Production of information requested in Commission order. 56 UCA IRs can be found in exhibits 20514-X0248 to 20514-X0250. Calgary IRs were provided confidentially

only; however, a placeholder was created later in Exhibit 20514-X0291 and the Commission’s IRs can be found in Exhibit 20514-X0251.

57 Exhibits 20514-X0254 to 20514-X0259. 58 Exhibits 20514-X0266 to 20514-X0268. 59 Exhibits 20514-X0261 and 20514-X0262. 60 Exhibits 20514-X0263 and 20514-X0264. 61 ATCO Utilities responded in exhibits 20514-X0270 to 20514-X0272, and the UCA’s reply is filed as exhibits

20514-X0273 and 20514-X0274. 62 The Commission considered both motions simultaneously and issued one ruling to address both motions, in


20514-X0276, and the appendix on the UCA motion can be found in Exhibit 20514-X0277. 63 Responses were provided confidentially to parties. The letter documenting this can be found in Exhibit 20514-

X0282. 64 Placeholders on the public record can be found in exhibits 20514-X0286, 20514-X0288 and 20514-X0292. 65 Exhibits 20514-X0300 to 20514-X0303. 66 Exhibits 20514-X0306 and 20514-X0307. 67 Exhibits 20514-X0309 and 20514-X0310.


Decision 20514-D02-2019 (June 5, 2019) • 89

and March 28, 2018, respectively, on which the Commission issued its rulings on May 3, 2018.68

The ATCO Utilities’ further responses to the Commission’s directions were filed on May 10,

2018.69

On April 19, 2018, in response to an ATCO Utilities letter,70 the Commission confirmed

that the information on the sale of ATCO I-Tek should be treated as confidential, in its entirety.71

On April 25, 2018, Calgary filed a motion requesting that the Commission rescind its

ruling on giving full confidential treatment to ATCO I-Tek sale information, arguing that there is

a strong presumption in favour of the open court principle in Commission proceedings, that the

basis for confidentiality no longer applies and that keeping the information confidential

prejudices Calgary and other parties who must keep public and confidential records separate.72

After reviewing the submissions from parties, the Commission dismissed Calgary’s motion on

June 4, 2018, noting that Calgary had not demonstrated that the Commission had made an error

in fact or law in the original ruling on confidentiality and that Calgary has access to the

confidential information which allows it to participate fully in this proceeding.73

A motion was filed by the ATCO Utilities on May 8, 2018, with respect to participation

of a former Commission employee on behalf of Calgary.74 The motion was filed in response to a

confidentiality undertaking filed by Calgary75 on behalf of Mr. Whyte. The ATCO Utilities

expressed significant concern with Mr. Whyte’s involvement in this proceeding on behalf of

Calgary, given his involvement in this proceeding during his previous employment with the

Alberta Utilities Commission. The ATCO Utilities submitted that the engagement of Mr. Whyte

by Calgary in relation to this proceeding was inappropriate and that Calgary was in a position to

obtain an unfair and prejudicial understanding of the Commission’s views on the subject application, evidence and rulings to date. The Commission established a process to address this

motion,76 which included response77 and reply submissions78 from parties. The Commission

issued its ruling on June 12, 2018, directing Mr. Whyte to recuse himself from further

participation in the proceeding and to provide a statutory declaration confirming his compliance

with Section 7(a) and (b) of his confidentiality undertaking.79

The ATCO Utilities filed correspondence dated June 19, 2018,80 in response to the

Commission’s ruling and Calgary’s submission of a statutory declaration for Mr. Whyte,81

requesting that the Commission require confirmation of what was being declared in the statutory

68 The Commission considered both motions simultaneously and issued one ruling to address both motions, in


20514-X0336 and the appendix on the UCA motion can be found in Exhibit 20514-X0337. 69 Exhibits 20514-X0343 to 20514-X0345. 70 Exhibit 20514-X0324, Letter to AUC re treatment of confidential information, April 16, 2018. 71 Exhibit 20514-X0326, AUC letter - Confidential treatment of sale information. 72 Exhibit 20514-X0331, ID 20514 City of Calgary Motion re Confidential Sale Information. 73 Exhibit 20514-X0357, AUC letter - Ruling on The City of Calgary motion regarding confidential information. 74 Exhibit 20514-X0339, ATCO Utilities Motion re Mr. Whyte Participation. 75 Exhibit 20514-X0338, Confidentiality Undertaking – Mr. Whyte.76 Exhibit 20514-X0340, AUC letter - Process schedule to address motion from the ATCO Utilities. 77 Following an extension request (filed in Exhibit 20514-X0341) that was granted by the Commission (see

Exhibit 20514-X0342), Calgary filed its response on May 15, 2018, in Exhibit 20514-X0349. 78 The ATCO Utilities filed its reply on May 18, 2018, in Exhibit 20514-X0351. 79 Exhibit 20514-X0363, AUC letter - Ruling on motion from the ATCO Utilities. 80 Exhibit 20514-X0366, 2018-06-19 AU Ltr - Statutory Declaration of Mr. Whyte. 81 The initial statutory declaration was filed in Exhibit 20514-X0365.


Decision 20514-D02-2019 (June 5, 2019) • 90

declaration and confirmation of the particulars of Mr. Whyte’s involvement thus far on behalf of Calgary. The ATCO Utilities submitted that they will have been prejudiced if Mr. Whyte assisted

Calgary prior to the Commission’s June 12, 2018 ruling. In its June 12, 2018 response,82 Calgary

provided a blackline version of the statutory declaration to show what had been revised, and

noted that the revisions were mainly for administrative ease in order to reply and relate to each of

Mr. Whyte’s undertakings signed in respect of his employment with the AUC for the

Commission and for Calgary. Calgary objected to the ATCO Utilities’ request for information

concerning Mr. Whyte’s involvement in the proceeding on behalf of Calgary, indicating that if

the request were granted, it would cause undue prejudice and harm to Calgary and would be

“contrary to the principles of legal privilege.”83 After being granted permission to file a response

to Calgary’s submission and supporting attachment on a limited confidential basis,84 the ATCO

Utilities filed their response,85 and both parties filed subsequent submissions on June 27, 2018,

and June 29, 2018.86 The Commission issued its ruling on July 23, 2018,87 finding that Mr. Whyte

had complied with the original June 12, 2018 ruling and that the ATCO Utilities’ motion should be rejected because the Commission was not convinced that Mr. Whyte had breached his

confidentiality undertaking to the Commission or acted in a manner that undermined the

procedural fairness of the proceeding.

On July 3, 2018, Calgary requested that the Commission place the confidential

Evergreen II decision on the confidential record of this proceeding, to be available to all parties

that had signed confidentiality undertakings. Calgary indicated that it was not making a similar

request with respect to the compliance filing decision (Decision 3378-D01-2016) but would not

object to it being placed on the confidential record if the Commission found it would “benefit the record.”88 The Commission issued its ruling on July 17, 2018, granting the motion, such that the

unredacted version of the Evergreen II decision would form part of the confidential record of this

proceeding.89

On September 24, 2018, the ATCO Utilities sought approval from the Commission to

have the entirety of the oral hearing conducted under a confidential module.90 After reviewing

submissions from Calgary, the UCA and the CCA, the Commission issued its ruling on

October 3, 2018, denying the request.91

82 Exhibit 20514-X0367, Calgary Letter ID 20514 re ATCO Letter Exhibit 366.83 Exhibit 20514-X0367, PDF pages 1 and 4.84 The Commission granted ATCO Utilities’ request to file its reply confidentially in Exhibit 20514-X0370,

noting that final determination on the confidentially of the document would be made after reviewing the

submission. In its July 23, 2018 ruling, the Commission directed the ATCO Utilities to file a redacted version of

the reply on the public record – this can be found at Exhibit 20514-X0399.85 The ATCO Utilities confidential reply was filed on June 26, 2018. 86 Exhibits 20514-X0372 (Calgary Letter ID 20514 re Whyte Statutory Declaration Filed June 27) and 20514-

X0373 (ATCO Utilities Letter to AUC re Response to Calgary). 87 Exhibit 20514-X0395, AUC letter - Ruling on ATCO Utilities motion regarding Calgary’s May 7, 2018

confidential undertaking. 88 Exhibit 20514-X0378, Calgary Letter ID 20514 re Filing of Unredacted Version of Decision 2014-169 (Errata). 89 Exhibit 20514-X0381, AUC letter - Ruling on Calgary request for unredacted version of Decision 2014-169

(Errata). 90 Exhibit 20514-X0438, ATCO Utilities letter – Rebuttal and Witness Panel.91 Exhibit 20514-X0483, AUC letter - Ruling on ATCO’s motion for a confidential hearing and oral hearing

details.


Decision 20514-D02-2019 (June 5, 2019) • 91

During the course of the oral hearing a number of objections were raised by the ATCO

Utilities that were ruled on by the chair. An overview of these objections and rulings is provided

below.

The ATCO Utilities objected to having a seven-page aid to cross-examination marked as

an exhibit on the basis that it could allow the entirety of the aid to be used in argument and not

only the few highlighted sentences that the witness was questioned on. The chair allowed the aid

to remain marked as an exhibit on the basis that the passages referenced in cross-examination

had been highlighted and counsel for Calgary understood that only the witness’ testimony pertaining to the highlighted sentences was relevant.93

Following conclusion of the oral hearing and submission of simultaneous argument from

parties, the ATCO Utilities requested an extension for parties to file simultaneous reply argument

92 Transcript, Volume 1-CONF, pages 40-44. 93 Transcript, Volume 3, pages 304-306. 94 Transcript, Volume 3-CONF, pages 391-393; ruling at Transcript, Volume 3-CONF, pages 455-456. 95 Transcript, Volume 3-CONF, pages 481-484. 96 Transcript, Volume 3-CONF, pages 543-547. 97 Transcript, Volume 4-CONF, pages 601-602.


Decision 20514-D02-2019 (June 5, 2019) • 92

on December 7, 2018, which the Commission granted on December 10, 2018.98 Confidential

reply arguments were filed by parties on December 20, 2018, the date that the Commission

considers as the close of record for the proceeding.

98 Exhibit 20514-X0496, AUC letter - The ATCO Utilities’ request for an extension to the deadline to file reply argument.


Decision 20514-D02-2019 (June 5, 2019) • 93

Appendix 5 – IT placeholders

(return to text)

An overview of the IT placeholders for the ATCO Utilities is provided below: In Proceeding 3577, ATCO Pipelines applied for forecast operations and maintenance

(O&M) IT costs of $3,729,000 and $3,813,000 for 2015 and 2016, respectively.99 The

Commission directed adjustments to IT volumes in Decision 3577-D01-2016 as follows, but

considered that the IT rates were approved on a placeholder basis pending resolution of this

proceeding:

444. The Commission is cognizant that there is an ongoing ATCO Utilities IT

common matters proceeding, Proceeding 20514, that will determine whether the MSA

pricing is reasonable. Given that the total forecast IT costs are calculated from the

forecast IT volumes and the negotiated IT pricing, total IT costs are to be treated as

placeholders in this proceeding, pending a determination in Proceeding 20514.

…

450. … The evidence also shows that IT volumes are largely determined on a per user

basis. Given the changes in the economic environment, it is not reasonable to assume that

the increased capital spending and increased staff due to retirements will occur at the

level originally anticipated by ATCO Pipelines.

451. Additionally, the Commission has denied ATCO Pipelines’ forecast costs for theasset management IT capital projects (Hyperion, Maximo Phase 2 and the GIS

[Geographic Information System], PIMS [Pipelines Integrity Management System] and

MMS [Maintenance Management System] enhancements), which may have a

corresponding impact on IT volumes. The Commission understands that forecast baseline

volumes are specified in the MSA, but for the purposes of this application, directs ATCO

Pipelines to submit revised forecast IT volumes in the compliance filing, which take into

account the denial of the asset management IT capital projects in this decision and to

account for changes in ATCO Pipelines’ forecast staffing levels as a result of the recent announcement of employee reductions by the ATCO Group.100

In Proceeding 22011, ATCO Pipelines applied for total forecast IT costs101 of $9,149,000

and 8,090,000 in 2017 and 2018, respectively.102 For comparison, the O&M IT costs are as

follows:

Table 3. Proceeding 22011 – IT services charged to operations

2015 actual 2016 actual 2017 forecast 2018 forecast

($)

Total 3,588,000 4,068,000 4,003,000 3,770,000

Source: Decision 22011-D01-2017, Table 31.

99 Decision 3577-D01-2016: ATCO Pipelines, 2015-2016 General Rate Application, Proceeding 3577,

February 29, 2016, Table 27, PDF page 91. 100 Decision 3577-D01-2016, paragraphs 444, 450-451.101 Inclusive of O&M IT, IT indirect capital and IT software project capital costs, which further include

outsourcing and internal IT function costs. 102 Decision 22011-D01-2017: ATCO Pipelines, 2017-2018 General Rate Application, Proceeding 22011,

August 29, 2017, Table 30, PDF page 84.


Decision 20514-D02-2019 (June 5, 2019) • 94

The Commission approved ATCO Pipelines’ forecast IT volumes subject to adjustments required due to directions elsewhere in the decision and reiterated that IT rates would be

examined in this proceeding.103

In Proceeding 23793, ATCO Pipelines’ 2019-2020 general rate application, which is

currently ongoing, ATCO Pipelines included IT rates in its applied-for placeholders, pending

resolution of this proceeding.104 ATCO Pipelines also provided the following forecasts for O&M

IT costs:

Table 4. Proceeding 23793 – IT services charged to operations

2017 actual 2018 estimate 2019 forecast 2020 forecast

($)

Total 4,344,000 4,186,000 3,995,000 3,996,000

Source: Exhibit 23793-X0001, application, Table 4.2.6-1, PDF page 111.

ATCO Electric Transmission In Proceeding 20272, ATCO Electric Transmission did not include any amounts for IT

costs in its placeholder schedule. In Decision 20272-D01-2016, the Commission acknowledged

that IT rates would be determined in this proceeding and directed ATCO Electric to confirm IT

placeholder costs and provide a breakdown of those costs by cost area:

227. The Commission notes that matters related to pricing of IT services will be

determined in the IT common matters proceeding, but the testing and determination of IT

volumes will occur in the current proceeding. For that reason, the Commission finds that

no placeholder is required for IT volumes. Since IT prices are being determined in

Proceeding 20514, a placeholder for IT cost amounts would not be unreasonable. The

Commission notes, however, based on the proceeding record, that ATCO Electric has not

proposed such a placeholder.

228. The Commission directs ATCO Electric, in the compliance filing, to confirm

whether it has proposed an IT cost placeholder in relation to the IT common matters

proceeding which is examining IT pricing. ATCO Electric is directed to prepare and file

a schedule, in the compliance filing, summarizing the IT costs included in the application

by test year, within each cost area, being O&M, ES&G [engineering, supervision and

general], and capital, displaying the accounts used for these charges in each cost area.105

In the compliance filing to Decision 20272-D01-2016, ATCO Electric submitted total

forecast IT costs of $3,123,647, $3,483,307 and $3,778,260 for 2015, 2016 and 2017,

respectively, and provided a breakdown of the forecast IT costs by cost area. In Decision 22050-

D01-2017,106 the Commission found that ATCO Electric had complied with its original direction.

In Proceeding 22742, being ATCO Electric Transmission’s 2018-2019 general tariff

application, ATCO Electric included forecasts for IT costs in its placeholder schedule.

103 Decision 22011-D01-2017, paragraphs 320 and 323.104 Proceeding 23793, Exhibit 23793-X0001, ATCO Pipelines 2019-2020 GRA, Table 1.2-1, PDF page 10.105 Decision 20272-D01-2016: ATCO Electric Ltd., 2015-2017 Transmission General Tariff Application,

Proceeding 20272, August 22, 2016, paragraphs 227-228 (Direction 14). 106 Decision 22050-D01-2017: ATCO Electric Ltd., 2015-2017 Transmission General Tariff Application

Compliance Filing, Proceeding 22050, June 19, 2017, paragraph 20.


Decision 20514-D02-2019 (June 5, 2019) • 95

Table 5. Proceeding 22742 – IT placeholders

2019 forecast 2020 forecast

($)

IT O&M 7,094,343 6,747,816

IT ES&G 5,399,680 5,203,928

IT capital 8,290,789 5,266,869

Source: Exhibit 22742-X0003.02, Placeholder schedules, Schedule 3.

ATCO Gas and ATCO Electric Distribution – utilities under PBR The rates for the distribution utilities are established under a PBR mechanism. In

Decision 22394-D01-2018,107 addressing the compliance filings for the 2018-2022 PBR rebasing,

the Commission found as follows:

308. The Commission has not been persuaded to treat IT common costs and pension

costs any differently than common group cost allocation costs for rebasing and base

K-bar purposes. Given that each of these costs is the subject of ongoing proceedings,

none of these costs has been finalized, and the Commission has not provided any

direction in those proceedings to the contrary, placeholder treatment should apply to each

of these types of cost.

Placeholder treatment of ATCO Gas and ATCO Electric Distribution’s IT costs was confirmed in Decision 23355-D02-2018:108

151. Regarding the IT common costs, the Commission observes that the related

proceeding, Proceeding 20514, is ongoing. Therefore, these costs remain as a

placeholder, pending finalization in Proceeding 20514 and any related compliance

filing(s). The Commission does not approve placeholder treatment for any cost claim

associated with the IT common costs proceeding, as it is not clear that the placeholder

approved in Decision 22394-D01-2018 was intended to apply to the ATCO Utilities’ costs of participating in the IT common costs proceeding. The ATCO Utilities may apply

for Commission approval to recover any cost claim amounts as part of the IT common

costs placeholder in a future proceeding in which any reconciliation of its IT common

costs is addressed. In the absence of any such approval, the Commission directs the

ATCO Utilities to exclude any cost claim amounts from the IT common costs

placeholder amounts.109

10. Placeholder treatment was also subsequently confirmed in Decision 23895-D01-2018 for

ATCO Electric Distribution110 and Decision 23894-D01-2018 for ATCO Gas.111

107 Decision 22394-D01-2018: Rebasing for the 2018-2022 Performance Based Regulation Plans for Alberta

Electric and Gas Distribution Utilities, First Compliance Filing, Proceeding 22394, February 5, 2018. 108 Decision 23355-D02-2018: Rebasing for the 2018-2022 Performance-Based Regulation Plans for Alberta

Electric and Gas Distribution Utilities, Second Compliance Filing, Proceeding 23355, October 10, 2018. 109 Decision 23355-D02-2018, paragraph 151.110 Decision 23895-D01-2018: ATCO Electric Ltd., 2019 Annual Performance-Based Regulation Rate Adjustment

Filing, Proceeding 23895, December 18, 2018, paragraph 28. 111 Decision 23894-D01-2018: ATCO Gas and Pipelines Ltd., 2019 Annual Performance-Based Regulation Rate

Adjustment Filing, Proceeding 23894, December 14, 2018, paragraph 28.


Decision 20514-D02-2019 (June 5, 2019) • 96

Appendix 6 – Summary of Commission 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. In summary, to account for the considerations listed above and to achieve just and

reasonable rates, adjustments to the MSA pricing are required. The ATCO Utilities are

directed to apply (i) a reduction of 13 per cent in MSA pricing in year 1 (which

automatically flows through to all subsequent years as in the example shown above); and

(ii) a glide path reduction in MSA pricing of 4.61 per cent (on a weighted average across

towers) in each of years 2 through 10. .......................................................... Paragraph 379

2. The Commission continues to be of the view that rates during the PBR term do not need

to be adjusted to reflect approved IT costs for the distribution utilities. Therefore, the

Commission will only direct the distribution utilities to incorporate the findings of this

decision for the purposes of recalculating 2018 going-in rates, and will not require the

distribution utilities to incorporate the further reduction argued by Calgary.

........................................................................................................................ Paragraph 392

3. The Commission directs ATCO Gas and ATCO Electric Distribution to reflect the

Commission’s disallowance in Section 6 of this decision in the recalculation of their

notional 2017 revenue requirement and 2018 base K-bar, taking into consideration any

impact of the disallowance on O&M, capital and indirect capital (including capital

tracker capital and non-capital tracker capital, as applicable). ATCO Gas and ATCO

Electric Distribution are directed to file compliance filings to this decision reflecting the

impact of this decision as part of their next annual PBR filings. The O&M and non-

capital tracker capital components of the notional 2017 revenue requirement are not

affected by 2017 costs because the notional revenue requirement is based on the lowest

O&M cost year during 2013-2016 for O&M and the 2013-2016 average of non capital-

tracker capital. Therefore, the distribution utilities’ notional 2017 revenue requirementshould incorporate the impact of the 2015 disallowance and approved glide path to

calculate the 2016 O&M and 2015 and 2016 non-capital tracker capital as determined in

Section 6. The distribution utilities should also demonstrate that the first-year

disallowance in 2015 does not affect the determination of the lowest O&M cost year and,

if it does, they should adjust the notional 2017 revenue requirement accordingly to reflect

a different lowest O&M cost year. Because the capital tracker capital component of the

notional 2017 revenue requirement is affected by 2017 costs, the distribution utilities’notional 2017 revenue requirement related to capital tracker capital and the 2018 base

K-bar should incorporate the first year disallowance in 2015, and the Commission-

directed glide path reduction as determined in Section 6 for 2016 and 2017. ATCO Gas

and ATCO Electric Distribution are further directed to show the disallowances

calculations and clearly show the directed IT disallowance on an annual basis by capital,

indirect capital, and O&M in the applicable rebasing and K-bar schedules in their next

annual PBR filings. ....................................................................................... Paragraph 395

4. Similar to the IT and CC&B disallowance determined in the Evergreen II decision and

related compliance filings, ATCO Pipelines and ATCO Electric Transmission will apply

a first year disallowance for 2015 and a glide path reduction as set out in Section 6 of this


Decision 20514-D02-2019 (June 5, 2019) • 97

decision. ATCO Pipelines and ATCO Electric Transmission are directed to file their

compliance applications to this decision in the compliance filings to their ongoing

GRA/GTAs, clearly showing the directed IT disallowance on an annual basis by capital,

indirect capital and O&M. ............................................................................. Paragraph 398

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