When the town of Hay River voted to end its decades-old franchise agreement with power distributor Northland Utilities (NUL) in 2016 in a bid to lower energy costs, the proposed switch set the stage for years of legal wrangling — and it’s not over yet.
Three years ago, the town made notice of its intent to purchase the rights to distribute, supply and sell electric energy in Hay River, exercising a right set out in the Cities, Towns and Villages Act (CTV Act) and in the franchise agreement contract. The town sought to purchase property used in connection with the services provided by Northland under the agreement, including distribution circuits, poles, underground ducts, transformer bases, backup diesel generators, conductors, street lights, meters and vehicles.
Town council voted to give a new contract to Northwest Territories Power Corporation (NTPC) a GNWT-Crown corporation.
But both sides were unable to settle on the terms of the purchase, and an arbitrator was called in to determine the value of Northland’s assets within the town – how much the town of Hay River would have
to pay to purchase them.
In February of 2018, arbitrator John Marshall — adopting a business cash flow methodology proposed by an expert hired by the town — released his partial final award, valuing Northland’s assets in Hay River at around $14 million.
Marshall valued Northland’s assets at 1.3 times their net book value, the value of an asset when depreciation is taken into account, to factor in future, potential earnings of the assets.
Northland is now appealing Marshall’s ruling, asking the NWT Supreme Court of Appeal to set aside his partial final award on the grounds the arbitrator erred by choosing a cash flow valuation methodology in assessing Northland’s assets, causing a “domino effect” that led to other errors in both law and fact.
When both parties met in court in Yellowknife late last month, Loyola Keough, a civil lawyer representing Northland, said Marshall misinterpreted the purchase as the sale of a business, not the sale of assets, and said he should have used a replacement costs new minus depreciation (RCN-D) methodology. That approach effectively asks: what is the approximate cost it would take the town to build the same system in place today – same size and same quality – with depreciation taken into account to reflect the fact the system has aged?
Had the arbitrator followed previous Supreme Court of Canada rulings in similar cases and used the RCN-D method, argues the power corporation, Northland’s assets would have been valued closer to $40 million.
But Thomas Marriott, a lawyer representing the town, reminded the court the arbitrator said adopting the RCN-D method would have resulted in Northland’s assets being valued at three times the current net book value.
Marriott said Northland wants the court to accept Marshall erred “by not blindly following a formula that gives three times the net book value.”
“Why would legislation (CTV Act) put in a right that has no practical application and that no one would dare evoke?,” asked Marriott, arguing the RCN-D method would render the purchase uneconomical for Hay River.
A factum from the town of Hay River, filed in October, states, “a right that can only be exercised by inflicting oppressive financial harm on the person exercising the right (the buyer), is barely a right at all.”
Northland argues it’s up to the town to discern whether or not the purchase is economically viable, and that the arbitrator inappropriately considered the town’s financial impact when choosing to adopt the business model valuation.
The two sides are also squabbling over which assets the town can purchase under the franchise agreement. Northland says the arbitrator erred when he ruled generation assets form a part of the franchise assets purchasable by the town.
The Town of Hay River wants the appeal dismissed, and for the partial final award to be upheld.
Justice Andrew Mahar has reserved his decision for early May. But as Doug Tenney, vice president for Northern development at ATCO, Northland’s parent company, recently told Yellowknifer, there’s still a long way to go before the matter is resolved.
Tenney said both sides have been working out of court towards reaching an agreement on a “number of other issues,” following the partial final agreement, including outstanding power bills.
“Customers are going to have outstanding bills with (Northland) — who owns that (once the sale is complete)?,” asked Tenney.
Tenney added he believes Northland and the town are “getting very close” to reaching common ground on the purchasing sale agreement, but that both sides remain at odds on some issues.
“So those issues will go back to arbitration for a final ruling,” he said, adding both sides are set to sit down with Marshall at the end of April.
After that, there’s more even more hurdles to clear.
Once the arbitrator’s final decision is released, Northlands will have to go before the Public Utilities Board to request the sale of the assets, which will prompt probes of the company’s costs and rates, along with whether or not the sale is in the public’s interest. Offering an optimistic estimate, Tenney said that process could take nine months.
Then, if the town of Hay River immediately flips the purchased assets to NTPC, that opens up a whole other purchase and sales agreement that must go before the Power Utilities Board.
Tenney doesn’t think the takeover will happen this year.