Canada: The Supreme Court Clarifies The Role And Nature Of The "Prudence" Test In Canadian Utility Regulation


The Supreme Court of Canada recently released its highly anticipated decisions on utility regulation in Ontario Energy Board v. Ontario Power Generation Inc., 2015 SCC 44 (noted as an Appeal to Watch in 2015 here) and ATCO Gas and Pipelines Ltd. v. Alberta (Utilities Commission), 2015 SCC 45 . These regulatory decisions analyzed a utility's ability to recover operating and capital costs from consumers through rate-setting, and the methodology to be used in approving rate increases.

The Ontario Power Generation Decision

In Ontario (Energy Board) v. Ontario Power Generation Inc., the Supreme Court reviewed the Ontario Energy Board ("OEB" or the "Board")'s decision to disallow $145 million in labour compensation costs applied for by Ontario Power Generation ("OPG") in its 2011-2012 rates application. The OEB had disallowed these costs, which were related to OPG's nuclear operations, on the basis that OPG's labour costs were not in line with comparable entities in the nuclear industry. The principal question on appeal was whether the Board should have used the "no-hindsight" prudence test to determine whether the labour compensation costs were reasonable.

Applying a standard of review of reasonableness,1 the Court overturned the decision of the Ontario Court of Appeal and reinstated the decision of the OEB and the Divisional Court, holding that the OEB's decision to disallow the $145 in labour compensation costs was reasonable.  The Court found that the costs in question were "best understood as at least partly committed"2 (as opposed to entirely "forecast" costs) because they resulted from collective agreements entered into between OPG and two of its unions but were also subject to management discretion because OPG had some flexibility to manage total staffing levels by way of, among other things, attrition of the workforce.

The Court focused on the statutory language pursuant to which the OEB is tasked to review payment amounts applied for by OPG, namely the language that requires the OEB to set "just and reasonable" payments and the absence of any other language prescribing the manner or methods to be used by the OEB under the relevant statutory provisions and regulations.3 The Court held that:

"[W]here a statute requires only that the regulator set "just and reasonable" payments, as the Ontario Energy Board Act, 1998 does in Ontario, the regulator may make use of a variety of analytical tools in assessing the justness and reasonableness of a utility's proposed payment amounts."4

The Court found that this was particularly true when, pursuant to section 6(1) of O. Reg. 53/05, the OEB is given express discretion over the "form, methodology, assumptions and calculations used in making an order that determines payment amounts for the purpose of section 78.1 [of the Ontario Energy Board Act]."5

The Court's analysis included an examination of the "prudence test" or "prudent investment test" as it has evolved in utilities regulation in the United States and Canada. The Court highlighted that a benefit of the prudence test is to ensure utilities recover the cost of failed investments that appeared reasonable at the time the investment decision was made, because to disallow recovery of such failed investments could imperil the financial health of utilities and therefore chill the incentive to make such investments.  This would in turn have negative long-run implications for consumers.6 Importantly, the Court found this key benefit of the prudence test applied particularly to capital costs as opposed to operational costs:

Prudence review of committed costs may in many cases be a sound way of ensuring that utilities are treated fairly and remain able to secure required levels of investment capital. [...] [P]articularly with regard to committed capital costs, prudence review will often provide a reasonable means of striking the balance of fairness between consumers and utilities.7

With the above in mind, the Court found that it was not unreasonable, under the particular regime under section 78.1 of the Ontario Energy Board Act, for the Board to evaluate committed costs using "a method other than a no-hindsight prudence review."8 Considering the nature of the costs – i.e., that they were operational costs as opposed to capital costs – and the circumstances under which they became committed – that is, that they were committed under a context of a "repeat-player", ongoing relationship between OPG and its unionized employees9 – the Court found that the OEB had not acted unreasonably in not applying the prudent investment test in determining whether the labour compensation costs were just and reasonable.

In dissent, Abella J. found that because the Board had said that it would utilize a prudence test for committed costs, it was not reasonable for the Board to not apply the prudence test to the costs in question, which Abella J. found to be for the most part non-reducible in nature due to the legally binding nature of the underlying collective agreements.10 Abella J. also points out a noteworthy aspect of the majority decision in respect of the use of the prudence test and the burden of proof set out in the Ontario Energy Board Act:

Applying a prudence review to these compensation costs would hardly, as the majority suggests, "have conflicted with the burden of proof in the Ontario Energy Board Act, 1998". To interpret the burden of proof in s. 78.1(6) of the Ontario Energy Board Act so strictly would essentially prevent the Board from ever conducting a prudence review, notwithstanding that it has comfortably done so in the past and stated, even in its reasons in this case, that it would review committed costs using an "after-the-fact prudence review" which "includes a presumption of prudence". Under the majority's logic, however, since a prudence review always involves a presumption of prudence, the Board would not only be limiting its methodological flexibility, it would be in breach of the Act.11

The above aspect of the majority's decision may indeed cause some confusion in future OEB rate cases.

The role of the Board in the appeal – tribunal standing and bootstrapping

The decision also considered the role an administrative decision-maker when  participating in the appeal or review of its own decisions. The Court reviewed the importance of ensuring that a tribunal's participation in the appeal of its decisions not give rise to concerns over the tribunal's impartiality while at the same time ensuring that a reviewing court's decision is fully informed in respect of the specialized matters considered by a given tribunal.

The Court determined that tribunal standing in this context is to be determined by the court conducting the first-instance review "in accordance with the principled exercise of that court's discretion".12 The Court provided the following non-exhaustive factors to assist courts in this respect:

  • If an appeal or review were to be otherwise unopposed, a reviewing court may benefit by exercising its discretion to grant tribunal standing.
  • If there are other parties available to oppose an appeal or review, and those parties have the necessary knowledge and expertise to fully make and respond to arguments on appeal or review, tribunal standing may be less important in ensuring just outcomes.
  • Whether the tribunal adjudicates individual conflicts between two adversarial parties, or whether it instead serves a policy-making, regulatory or investigative role, or acts on behalf of the public interest, bears on the degree to which impartiality concerns are raised. Such concerns may weigh more heavily where the tribunal served an adjudicatory function in the proceeding that is the subject of the appeal, while a proceeding in which the tribunal adopts a more regulatory role may not raise such concerns.13

With the above factors in mind, the Court found that it was not improper for the Board to have participated by arguing in favour of the reasonableness of its decision on appeal: the Board was the only respondent in the initial review of its decision14 and the Board is a public interest regulator with a broad mandate as opposed to a tribunal whose function is to adjudicate individual conflicts between two or more parties15.

The Court then turned to whether the substance of the Board's arguments amounted to "bootstrapping", which occurs when a tribunal "seeks to supplement what would otherwise be a deficient decision with new arguments on appeal."16 The Court found that the OEB did not step impermissibly beyond the bounds of its original decision as its submissions either highlighted what was apparent on the face of the record or responded to parties' arguments.17

The ATCO Decision

This appeal was brought by ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd. ("ATCO") from an Alberta Court of Appeal judgment affirming the Alberta Utilities Commission (the "Commission") decision that rejected ATCO's request to recover certain pension costs in the 2012 year.18 Specifically, ATCO sought to recover the pension costs associated with setting the cost of living adjustment ("COLA") at 100% of the annual consumer price index ("CPI") up to a maximum of 3% for 2012. Instead, the Commission held that a COLA at 50% of annual CPI up to a maximum of 3% was reasonable as ATCO's proposal was not "an acceptable standard practice" among comparator groups and a reduction in the COLA would not limit ATCO's ability to attract new employees, or encourage existing employees to leave.19

The Supreme Court, using a standard of review of reasonableness,20 unanimously dismissed ATCO's appeal. In its analysis, the Court found that the Commission was entitled to set rates pursuant to the Alberta's Electric Utilities Act and Gas Utilities Act (collectively, the "statutory framework"). This statutory framework permitted the Commission to set just and reasonable rates, and provided Utilities with a reasonable opportunity to recover costs, so long as the costs were prudent.21

In its analysis, the Court held that the prudence requirement is to be understood in its ordinary meaning, and that a prudent cost is a reasonable cost. 22 The Court rejected ATCO's argument that the Commission must use a "prudence " or "no-hindsight" test in qualifying the costs that a Utility is entitled to recover, and found that no specific methodology is set out by the statutory framework to determine whether costs are prudent. 23  The Court went further and added that the Commission is permitted to use a variety of analytical tools and evidence to make that prudence determination, so long as the ultimate rates decided are just and reasonable to consumers and the utility.24 The Court also rejected ATCO's argument that a Utility's costs are presumed to be prudent, and instead held that it is the Utility's burden to establish prudence.25 The Court also clarified that regulators are not permitted to "justify a disallowance of prudent costs solely because they would lead to higher rates for consumers", but are permitted to consider the "magnitude" of any particular costs in determining whether that cost is prudent.26


These decisions are important because they serve as a clarification that as long as a regulator's review of a utility's rates is guided by the statute which gives the regulator its authority, it otherwise has the discretion to apply the methodologies it sees fit in order to determine whether rates are just and reasonable.  As the Court stated in the OPG case, the Court of Appeal had "made certain statements that suggest that the prudent investment test was a necessary approach to reviewing committed costs."27  The OPG decision makes it clear that this is not the case.

Also notable is that the Court's decisions in ATCO and OPG uphold a decision of the applicable province's energy regulatory body to reduce a utility's applied-for amounts after considering benchmarking or comparator group evidence which weighed in favour of the reduction in question. These decisions will therefore likely be seen as consistent with trend towards benchmarking as a key tool in utility regulation.

Finally, the OPG decision also provides helpful guidance in respect of the participation of administrative decision-makers in the review or appeal of their decisions.

Case Information

Ontario Energy Board v. Ontario Power Generation Inc., 2015 SCC 44

ATCO Gas and Pipelines Ltd. v. Alberta (Utilities Commission), 2015 SCC 45

Date of Decisions: September 25, 2015


1 Ontario Energy Board v. Ontario Power Generation Inc., 2015 SCC 44 ["OPG"] at para 73.

2 OPG, para. 106.

3 OPG, para. 103.

4 OPG, para. 103.

5 OPG, para. 103.

6 OPG, para. 91.

7 OPG, para. 104.

8 OPG, para. 104.

9 OPG, para. 109.

10 OPG, para. 134.

11 OPG, para. 151.

12 OPG, para. 57.

13 OPG, para. 59.

14 OPG, para. 60.

15 OPG, para. 61.

16 OPG, para. 64.

17 OPG, para. 70.

18 ATCO Gas and Pipelines Ltd. v. Alberta (Utilities Commission), 2015 SCC 45 at para. 1 ["ATCO"].

19 ATCO at paras. 19-20.

20 ATCO at paras. 26-28.

21 ATCO at para. 29.

22 ATCO at paras. 33-38.

23 ATCO at paras. 30-31, 46-47.

24 ATCO at paras. 42-45.

25 ATCO at paras. 42 and 45.

26 ATCO at paras. 60-62

27 OPG at para. 100.

To view the original article please click here.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.