On September 25, 2015, the Supreme Court of Canada issued two
decisions related to utility ratemaking. Much has been written
about the OEBv. OPG decision, in
relation to the Court's review of the "prudent investment
test" (as we discussed
here), and the administrative law implications of the decision
(as we discussed here). However, the other decision issued on
that date, ATCO Gas and Pipelines Ltd. v. Alberta
(Utilities Commission) (ATCO), also addresses
some important issues.
One of the issues addressed in ATCO is the degree to which a utility
regulator can consider rate impacts when evaluating whether to
approve utility costs for recovery. The Supreme Court concluded
that rate impacts cannot be used by a regulator to justify
disallowance of an otherwise reasonable cost.
In ATCO, the utilities argued that the
Alberta Utilities Commission (AUC) was "preoccupied" with
considering the aim of reducing rates charged to customers, and
this improperly influenced the AUC's decision to disallow some
pension costs related to a cost of living adjustment. The Court did
not accept that the AUC had acted improperly on the facts of the
However, the Court's unanimous decision in ATCO, written by Justice Rothstein,
includes some interesting statements about what would have been
improper (and unreasonable).
The Court emphasized that a key principle in Canadian regulatory
law is that a regulated utility must have the opportunity to
recover its operating and capital costs through rates. The question
to be asked is whether these costs are "reasonable" or
"prudent." If the costs are reasonable (the Court found
that "prudent" and "reasonable" are essentially
synonymous), then the regulator must allow the utility the
opportunity to recover those costs in rates. The regulator cannot
use the impact of increased rates on consumers as a basis to deny
recovery of reasonable or prudent costs required to efficiently
provide the utility service.
The Court's conclusion on this topic is that any time a
regulator disallows a cost, that decision will be based on a
conclusion that the cost is greater than ought to be permitted. In
that scenario, if the cost was allowed, then rates would be
unreasonably high. However, the opposite does not hold true –
a regulator cannot deny recovery of a cost solely because rates
would be too high as a result. We can expect to see this line of
reasoning (which, to be fair, is not a new approach) repeated and
relied upon by applicants in future rate proceedings.
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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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
The Government of Alberta recently announced a number of policy changes that will impact the Alberta Electricity Market, composed of its generators, transmitters, distributors, retailers, electricity consumers and wholesale electricity market.
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