Code of Conduct Regulation - Interim Approvals - Compliance Testing (March 11)

March 11, 2005

 

Re: Code of Conduct Regulation – Interim Approvals - Compliance Testing

ENMAX Energy Corporation
ENMAX Power Corporation
FortisAlberta Inc.

Introduction

The Market Surveillance Administrator (“MSA”) is reporting on compliance testing which was conducted with the assistance of Grant Thornton LLP.  The testing related to the Code of Conduct Regulation (“Code”), and interim compliance plan approvals which were in effect during 2004.

This letter sets out the context for the public reports prepared by Grant Thornton LLP in respect of the above named parties; those reports are

It is important to note that the public reports are abbreviated from the complete reports provided to the MSA, in order to preserve the confidentiality and integrity of the testing procedures.  Further, the public reports should be considered as ‘exception reporting’, in that they only describe areas where Grant Thornton LLP was of the view that a party was non-compliant to some degree.  The public reports do not explicitly document areas where a party was found to be compliant.

The views of the MSA in respect of the reports are set out below.

Compliance Plans
Compliance plans are required from owners and their affiliated retailers; the plans set out the systems, policies and mechanisms to be used to ensure compliance with the Code.  Compliance plans must be approved by the MSA before they are effective, and before the affiliated retailer begins to provide retail electricity services.

Depending upon the complexity of the business operations involved, the drafting, review and approval process can require a significant amount of time and effort from the parties before final approval is granted.

Interim Approvals
In December, 2003 the MSA issued interim compliance plan approvals for Aquila Networks Canada (Alberta) Ltd., ENMAX Energy Corporation, ENMAX Power Corporation, EPCOR Distribution Inc., EPCOR Energy Services Inc., EPCOR Energy Services (Alberta) Inc. and EPCOR Merchant and Capital L.P., based upon compliance plan filings received to that point.

The interim approvals were granted pursuant to s. 32 of the Code.

The interim approvals allowed those parties to meet the requirements of the Code and undertake retail activities while work continued toward full compliance plan approval.  The interim approvals carried terms and conditions, including a February 29, 2004 expiry date and the requirement for additional reporting.

By request, the interim approvals granted to those parties were further extended to June 1, 2004, to facilitate continued work on the compliance plans and other matters.

None of the parties operating under interim approval was able to obtain final approval of their compliance plan by June 1.  All parties requested a further extension to the expiry date; however, under the circumstances, the MSA did not consider it appropriate to extend the interim approvals past that date.  Thus, after June 1 all of the parties operating on interim approval became non-compliant with the Code requirement to have an approved compliance plan in place.

Ultimately, all of those parties were subsequently able to obtain final approval for their respective compliance plans during the month of June.

In addition to the reporting provided as a condition of each interim approval, the parties were required to address their non-compliance in their quarterly and annual compliance reporting.

Of note, Aquila Networks Canada (Alberta) Ltd. became FortisAlberta Inc., pursuant to a transaction effective May 31, 2004.

Review of Compliance During Interim Approvals
Normally, the conduct of the parties during the period at issue would be tested through the “audit” process contemplated under the Code.  In respect of these parties the timing of the “audit” would have been no earlier than Q1 2005.  However, the MSA felt that a specialized compliance review was appropriate for various reasons, and wanted to commence the testing in 2004, as close to the period of interim approval as practicable.  Some of the reasons for this view are set out below.

The MSA wanted to assure other market participants and stakeholders at large that the interim approvals had not given any unfair advantage to parties who had not obtained full compliance plan approval.  It is important to remember that other parties had in fact obtained full compliance plan approval in respect of their planned retail operations.  To the MSA, assuring a level playing field is an important goal.

The MSA also wanted to assure itself as to compliance during the period in which full compliance plan approvals were not in place.  A compliance plan documents the systems, policies and mechanisms through which an owner or affiliated retailer will seek to ensure that its conduct and operations are compliant with the requirements of the Code.  In the view of the MSA, the failure to have a satisfactory compliance plan in place heightened the risk of non-compliance.

The MSA used the powers given to it under the Electric Utilities Act (“Act”) to undertake the specialized review with the assistance of Grant Thornton LLP.  In particular, reference is made to s. 49 and s. 55 of the Act.

In September, 2004 the MSA began planning a review for the period January 1 through June 30 of that year, focusing on the conduct and operations of the parties who had been subject to interim compliance plan approvals.

Given that the review was designed and contemplated to provide assurance as to Code compliance during that period, the MSA decided that the testing could also meet the need for a Code related “audit” for that period.  There would be no need to test compliance a second time unless specific concerns arose.

The MSA retained Grant Thornton LLP to carry out the review on behalf of the MSA, in order to benefit from the specialized skills and experience they have as auditors.  The planning and implementation of the review was a significant undertaking.  The actual review commenced in early November, 2004 and carried on into the first part of 2005.

Testing
The scope of the testing undertaken by Grant Thornton LLP is set out in each public report.   As mentioned above, each public report is an abbreviated version of the full report provided to the MSA.  The details of the testing procedures were not shared with the parties being tested, either during the testing or after, so that the confidentiality and integrity of those procedures would remain intact.

The testing took several months to complete, in part because of the Christmas holiday period and because of challenges in scheduling meetings with key individuals.  In some cases Grant Thornton LLP also experienced delays in obtaining information requested.

Given that the testing for FortisAlberta Inc., ENMAX Energy Corporation and ENMAX Power Corporation was completed most quickly, and that the testing of the EPCOR entities remained ongoing, the MSA decided to publish the reports in two stages.

This letter and the attached reports speak to the testing and reporting conducted in relation to FortisAlberta Inc., ENMAX Energy Corporation and ENMAX Power Corporation.  For reasons set out above, the reporting which pertains to the EPCOR entities was delayed, and will likely be released in April.

Findings and Recommendations
As part of the review process, the findings have been discussed and clarified with the party being reported on.

It is important to note that the public reports constitute exception reporting, in that they do not explicitly reflect areas where a party was found to be compliant with the Code.  To put the findings in context, the reports show that there were relatively few areas where the parties were found to be non-compliant.

Given the period being tested, the findings date to the period before full compliance plan approvals were granted.  This is worthy of note, in that the subsequent compliance plans should address some of the concerns raised around the January 1 – June 30, 2004 period.

The MSA certainly expects that the new compliance plans will be adhered to, and will have a positive effect on compliance.  Those compliance plans will be tested in due course, as contemplated by the Code and the Act.

The MSA is considering the recommendations offered by Grant Thornton LLP, and will pursue any relevant changes or other outcomes with the parties as appropriate.

Finally, the reports speak to the level of cooperation received by Grant Thornton LLP during the reviews.  The MSA also appreciates the cooperation shown by the parties in relation to these matters.

Please direct any inquiries in respect of these matters to the attention of Wayne Silk, at 403-705-8522 or wayne.silk@albertamsa.ca, or to Douglas Wilson, at 403-538-3445 or douglas.wilson@albertamsa.ca.

Yours truly,

“Original signed”

Martin J. Merritt,
Market Surveillance Administrator.

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