Canada: Back To The Future: Utility Asset Regulation

In Alberta, the rates which Customers pay for utility service typically include the utility's costs of the assets which provide the service. A recent Alberta Court of Appeal decision has re-opened what was considered settled law on how these costs should be assessed by the Alberta Utilities Commission (Commission). Where the law, and the practices and policies of the Commission go from here, is uncertain.

What happened?

Following the 2016 wildfires in the Fort McMurray area, ATCO Electric Ltd. (ATCO) applied to the Commission to recover $15 million from Customers as compensation for costs incurred as a result of the wildfires. In Decision 21609-D01-2019 (AUC Decision), the Commission allowed recovery of some of the costs, but did not allow ATCO to continue to recover the remaining net book value of assets in the Regional Municipality of Wood Buffalo (RMWB) which were destroyed by wildfires.

ATCO appealed the Commission's order to remove the net book value of the destroyed assets. In Atco Electric Ltd. v Alberta Utilities Commission, 2023 ABCA 129 (ATCO Wildfires), the Alberta Court of Appeal allowed the appeal, varied the AUC Decision as provided for in the Court's reasons, and referred the matter back to the Commission for "further consideration and redetermination."

Why was the appeal allowed?

In considering the matter of the destroyed ATCO assets, the Commission applied previous decisions it and the Courts made concerning utility asset dispositions. These decisions included the Commission's 2013 decision in a generic (all utility) proceeding to consider utility asset dispositions (Decision 2013-417), as well as the judgment of the Alberta Court of Appeal which reviewed and upheld that Commission decision: FortisAlberta Inc. v Alberta (Utilities Commission), 2015 ABCA 295, 389 DLR (4th) 1, leave to appeal refused, SCC File No. 36728 (Fortis Appeal Decision).

The Commission concluded and made a factual finding that the circumstances of the retirement of the destroyed assets in the RMWB wildfire were "very similar" to characteristics of the retirements of utility assets in the 2011 Slave Lake wildfire. In a previous proceeding concerning the latter (Decision 2014-297 (Errata)), the Commission found that the destruction of the assets constituted an extraordinary retirement for regulatory purposes.

The finding of an extraordinary retirement was key to the outcome, as the Commission had previously confirmed in the UAD decision that the remaining costs of assets subject to an extraordinary retirement would not be recovered from utility Customers after the assets were removed from service.

In the present matter, ATCO was granted leave to appeal the AUC Decision on two issues: (i) whether the Commission erred in law by fettering its discretion regarding the recovery of the prudent costs of the assets destroyed by the wildfires; and (ii) whether the Commission erred in its interpretation of the Electric Utilities Act, by either applying inapplicable concepts from gas utility legislation or by disregarding provisions which allow the utility a reasonable opportunity to recover its prudent costs to provide utility service.

The Court of Appeal's analysis started with a consideration of the appropriate standard of review. The Court confirmed that the standard was that of correctness, as the Alberta Utilities Commission Act allowed for appeals of decisions from the Commission only on questions of law.

In disposing of the first issue on appeal (fettering of discretion) the Court stated that this was not an issue requiring determination, because there is a difference between the Commission looking to follow stare decisis and actually fettering its discretion. Rather, the issue to be decided was instead whether the Commission correctly interpreted, and applied the legal standards that governed the circumstances before it, as the Commission has no discretion to ignore the applicable statutes, or binding precedents.

The Court then reviewed the key jurisprudence upon which the Commission relied in formulating the UAD Decision and its application to the present matter. The focus was upon the Stores Block decision (ATCO Gas & Pipelines Ltd. v Alberta (Energy & Utilities Board), 2006 SCC 4, [2006] 1 SCR 140) (Stores Block) and the Fortis Appeal Decision. The Court concluded that Commission erred in reasoning that these earlier decisions dictated its treatment of assets stranded by unforeseen forces of nature in the context of setting just and reasonable rates.

The Court specifically found that the Commission "overread" the implications of Stores Block, and the Fortis Appeal Decision as a mandatory basis to set utility rates. It further found that nothing in the Electric Utilities Act functioned to limit the Commission's discretion over utility depreciation or stranded assets.

It confirmed that the property related concepts established in the UAD Decision, and prior jurisprudence on asset ownership matters (including in Stores Block) are of peripheral importance to the determination of whether a utility should be allowed the opportunity to recover its prudently incurred costs. These concepts included the "allocation of risks and benefits associated with property ownership" and "fundamental property and corporate law principles".

The Court also rejected the proposition that Stores Block established a distinction between the cost treatment of stranded assets as between an ordinary retirement and an extraordinary one. The basis for the Court's rejection appears to be twofold. First, Stores Block involved the sale or disposition of a surplus utility asset, such that there were proceeds of disposition to which the utility could apply against the net book value of the sold assets. Second, the reason the RMWB assets were no longer in service was because they were destroyed, as opposed to being sold by the utility outside of the ordinary course of business, which was the case in Stores Block.

The Court further expressly ruled that Stores Block should not "be read as extending to situations where assets in active service are destroyed by natural forces." When those situations arise, the question to be decided is not "where the ownership interests lie", but rather whether "it is just and equitable to continue to give the utility a reasonable opportunity to recover the costs prudently incurred" [emphasis added]. The costs in question were the undepreciated capital costs (net book value) of the destroyed RMWB assets.

The Court reaffirmed that the Commission's methods and practice of identifying and applying the type of asset retirement as the basis for utility recovery of the remaining costs of the stranded asset was not "driven" by Stores Block nor tied to any property interests. While the Court did note that a distinction by retirement type may apply and be helpful in some cases where assets were removed from utility service, it expressly excluded cases where the assets were destroyed while in service due to the forces of nature.

The Court highlighted its reasoning by finding that the ultimate issue and question for the Commission to decide was "Should the unexpected loss from forces of nature fall on the utility's customers or shareholders?" The determination of the matter involves the balancing of competing policy considerations by the Commission; the Court concluded that the Commission erred in thinking that Stores Block had already dealt with this issue.

Where to from here?

In ATCO Wildfires, the Alberta Court of Appeal has clarified and modified several regulatory and legal issues which were previously considered to be settled.

Firstly, the Stores Block decision and the property law principles derived from it have been clearly distinguished by the Court to have no application to cases where a utility asset is removed from service for reasons that are due to destruction by forces of nature such as wildfires.

Secondly, where such events arise, the Commission is precluded from relying upon its determination as to the type of retirement which occurred (i.e., ordinary versus extraordinary) to allocate the remaining undepreciated costs (losses) as between the utility shareholders and customers.

Thirdly, a case by case assessment will be required by the Commission to determine who should bear the losses caused by the destruction, in the context of a "just and reasonable tariff." This assessment will also involve the Commission exercising its discretion in areas such as determining "what expenses can be included as recoverable costs and expenses, how to deal with depreciation, and how to deal with stranded or unpredictably destroyed assets."

The ATCO Wildfires decision now stands as good law in Alberta. A number of potential outcomes and issues arise from the decision.

It is not clear what process approach the Commission should take to assess the rate treatment of destroyed assets. On the one hand, the Court of Appeal considers the assessment must occur in the context of setting just and reasonable rates. However, the Court was also clear in the case of the RMWB assets, the key issue to be decided is who should bear the losses as between Customers and utility shareholders in the case of a specific event and a specific set of assets.

For future cases, a key issue will be whether utility asset retirements or depositions should occur in a general rate application context, where all elements of the utility rates are considered to establish a just and reasonable tariff, or in a separate (stand alone) proceeding. The application of ATCO was a separate and stand alone proceeding, and presumably will be reconsidered by the Commission on the same basis.

The Commission may need to consider several additional matters as it addresses the effect of the ATCO Wildfire decision, including:

• whether it will be necessary to revisit its principles and approach concerning all types of utility asset dispositions, or simply with respect to utility assets destroyed by forces of nature;
• whether the rehearing of the ATCO Electric application should be open to all interested parties given the comments made by the Court in ATCO, or just to parties who participated previously; and
• how regulatory efficiencies can be achieved (the Commission has embarked on a streamlining initiative to foster efficiencies with its proceedings).

The matter of how to treat utility asset dispositions and retirements in Alberta has a long history before the Commission and its predecessors. The ATCO Wildfires decision has provided another chapter.

With special thanks to Joelle French, Student-at-Law, for assistance and research in the preparation of this article.

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.