Canada: Supreme Court Determines Regulator Discretion Is Wide And The Prudency Test Is Ongoing

The past week has seen three significant decisions relating to the manner in which the rates of public utilities are to be determined in Canada. Although one can argue about whether the decisions clarify and confirm existing law or create new law, no one can reasonably dispute that utilities face new challenges to establish rates that will allow them to recover all of their capital and operating costs as a result of these decisions.

On September 18, 2015, the Alberta Court of Appeal handed down its decision in FortisAlberta Inc. v Alberta (Utilities Commission), 2015 ABCA 295. Nearly all Alberta electric and gas utilities participated to argue strongly that they should be able to continue to recover capital costs of facilities committed to the service of customers and determined by the regulator to be in the public convenience and necessity even if those assets later ceased to be useful in providing public utility service due to an unanticipated event. The AUC held that utilities must remove from their rate base any assets that are no longer used and useful and further, that there is no ongoing right to be compensated for the unrecovered costs. The Alberta Court of Appeal accepted that decision was reasonable and dismissed the appeal from it.

Adopting similar logic, on September 25, 2015 the Supreme Court of Canada (SCC) upheld the Alberta Utilities Commission (AUC) and Ontario Energy Board (OEB) decisions in two cases involving the prudence of operating costs (ATCO Gas and Pipelines Ltd. v Alberta (Utilities Commission), 2015 SCC 45 and Ontario (Energy Board) v Ontario Power Generation Inc., 2015 SCC 44). In those decisions, the SCC held that the AUC and the OEB had not acted unreasonably in denying the utilities the ability to recover operating costs (COLA benefits in relation to company pension expenses which had yet to be finalized, in the Alberta case, and, wage costs under a collective agreement which were entirely foreseeable and, at the time of hearing, largely unavoidable but which the utility had failed to establish were prudently incurred, in the Ontario case). The utilities' argument that the costs should be presumed prudent until proven otherwise was expressly rejected by the regulator and that was held to be reasonable by the Courts.

The burden of all three of these decisions is likely to be felt in all Canadian jurisdictions and can be reduced to the following propositions:

  1. The Courts will defer to the regulator's interpretation of its statute wherever discretionary language is used. Thus, on policy issues in most cases, the regulator will be a Court of first and last resort;
  2. The onus to prove prudency or reasonableness (for operating costs) or usefulness (for recovery of capital costs) rests squarely on the utility and it will have to be able to defend all of its costs both at the time of commitment and for so long as they remain;
  3. The bounds on what is or what is not prudent and what the utility must show to demonstrate prudence are to be established by the regulator. So long as the regulator's decision is justified in a coherent and transparent manner, it is likely not to be interfered with by the Courts.

The implications of these determinations for utilities when seeking approval of its rates are these:

  1. Significant prehearing efforts will need to be made to determine what costs are and are not a potential concern to the regulator;
  2. The evidence supporting cost-recovery will need to demonstrate a sharp focus on the ratepayer perspective. That demonstration will best be achieved through contemporaneous documents that evidence efforts to achieve appropriate objectives on a long-term least cost basis;
  3. Efforts will need to be made to educate regulators on the need to avoid using hindsight to review all decisions made by the utility or otherwise respond to short term conditions when setting long term rates; and
  4. Utilities should assess the additional risk those decisions impose on their operations and seek adjustments to their ROE as appropriate in light of those assessments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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