Alberta Utility Asset Disposition (UAD) – Court of Appeal Upholds Commission & Utilities Seek Leave from the Supreme Court

1. Introduction

The last quarter of 2015 was a busy one in respect of judicial activity of interest to Alberta utilities: a decision by the Alberta Court of Appeal (ABCA); two decisions by the Supreme Court of Canada; and two applications for leave to the Court from that ABCA decision.

A short while ago, Gordon Kaiser observed that the Court’s 2006 Stores Block1 decision was the ‘beginning of the end’ of the debate about who bears the cost risk of stranded utility assets, and that the ‘end’ of the controversy was marked in 2015 with the unanimous affirmation by the ABCA in FortisAlberta2 of the Alberta Utilities Commission (AUC or Commission) Utility Asset Disposition (UAD) decision.3

My first task is to comment on the FortisAlberta appeal decision. But in light of the Court’s decisions in OPG4 and ATCO Pension5 (which concerned Alberta utilities legislation) – released a mere week after FortisAlberta – and which have upended the prudence doctrine, at least as it relates to utility operating costs, and the fact that FortisAlberta is now the subject of two leave applications at the Court, a brief, high-level comment on the latter developments is also appropriate. Perhaps it is the case that we are not quite at the ‘end.’

2. Stores Block

As is well known, in Stores Block, the Court narrowly found that all gains and losses arising from the disposition of an Alberta gas utility asset, outside the normal course of business, were for the account of the utility and its shareholders, on the principal ground that utility ratepayers enjoy no property right in the assets used to provide them with service.

Subsequent ABCA decisions (Carbon6, Harvest Hills7, Salt Caverns I and II8), building on Stores Block, established that only gas assets operationally deployed in providing service can be included in the utility rate base and that if not used or required to be used to provide service, such assets must be removed from rate base, in the normal course. By its own admission, the ABCA in these decisions has elected to broadly apply the Stores Block principles.

3. UAD Decisions

a. AUC

A stranded utility asset in Alberta is one that is no longer used or required to be used in utility service, prior to the end of its anticipated service life, and therefore, prior to the recovery by the utility of its capital investment in that asset. If the circumstance is an ‘ordinary retirement’ – due to a cause reasonably anticipated in setting depreciation provisions – then ratepayers will continue to be responsible for the undepreciated capital cost of the now stranded asset. But in the circumstance of an ‘extraordinary’ retirement – due to a cause that was not reasonably anticipated, such as a fire or flood – the utility and its shareholders will absorb the undepreciated capital cost.

In addressing the question of who, as a matter of policy under the umbrella of its broad rate-making authority, is to bear the risk of stranded assets, the AUC relied on Stores Block and the subsequent ABCA decisions.9 Under the umbrella of its broad rate-making authority, the AUC concluded that stranded assets can longer be used to provide service, and so must be removed from rate base, with any gain or loss to the account of the utility.

b. ABCA

The Alberta utilities obtained leave to appeal the UAD Decision, on the question of whether the AUC had wrongly imposed on them a new “prudent cost recovery risk” such as to deprive them of the opportunity to recover their prudently incurred costs of stranded assets. They challenged what they said was an unwarranted extension of Stores Block, albeit on somewhat different grounds. The gas utilities argued Stores Block ought to be limited to its facts, and asset dispositions outside the normal course, and should not apply to other assets, and certainly not stranded assets. Otherwise, they said, their entitlement to recover all of their prudently incurred costs would be undermined.

The electric utilities, while supporting that argument, also argued that since the deregulation of their industry in Alberta, they were subject to an entirely different legislative scheme and regulatory construct, where the ‘used or required to be used’ principle was simply not applicable, having been replaced by a guarantee of the recovery of their prudently incurred capital investment costs.

That scheme, they noted specifically, excluded the concept of rate base and used or required to be used. All of this, the transmission utilities argued, made sense in light of the fact that the Alberta AESO could direct them to invest in facilities: how could they be at risk of not recovering their capital investments when they could not control those investments?

The ABCA upheld the UAD Decision and found no basis for appellate intervention.

First, given that the appeals raised issues of the interpretation and application of Alberta’s utility legislative regimes and the AUC’s rate-making authority, the ABCA had little difficulty concluding that its review would proceed on a deferential standard of reasonableness. This was a key determination: the issue for the Court was not whether the utilities’ interpretation was a reasonable one, but whether the AUC’s interpretation was unreasonable.

Second, the Court rejected the utilities’ contention that in participating in their appeal, the AUC had overstepped the accepted boundaries for a regulator’s participation in an appeal of its decision, concluding that the AUC’s participation had been necessary and helpful.

The Court provided a detailed context for its decision, in a thorough review of the historical treatment of stranded assets in general, the Stores Block saga and its own subsequent decisions which extended the Stores Block principles to the AUC’s rate-making function, as opposed to simply the disposition of utility assets outside the normal course of business. In the Court’s view, it was bound by those decisions, absent a reversal or reconsideration of Stores Block, or a legislative amendment.

The Court considered that the UAD Decision was a ‘generic policy decision’ by the AUC, a broad statement of how the AUC would deal with the issue of stranded assets in the future. It concluded that Alberta ratepayers should not have to pay for service they don’t receive, and while the utilities were entitled to a reasonable opportunity to recover prudent capital investment, the legislation did not make this a guarantee. A reasonable opportunity is just that, which in the Court’s view, was reflected in the Commission’s applicable depreciation methodology and procedures. As a matter of policy, it was not unreasonable for the AUC, in the exercise of its broad authority, to assign the risk of stranded assets to the utility.

As to the electric utilities, the ABCA acknowledged that while the recovery of prudent investment model was a permissible interpretation of their legislative scheme, it was not the only one, and concluded that it was not unreasonable for the AUC to have interpreted that scheme as providing a similar reasonable opportunity to recover prudent investment capital.

Importantly, the ABCA noted that the AUC’s policy did not amount to a fetter of its discretion, given its authority to adjust for utility depreciation expense in respect of stranded assets in the circumstance of an extraordinary retirement, and so to “retain the flexibility to fulfill its mandate on a case by case basis.”10

The fundamental conclusions of the Court were taken in light of its view of the Alberta legislation, the law in Stores Block and its own subsequent decisions, and the Commission’s interpretation of them. The issue of stranded asset risk, in the view of the ABCA, is informed by public interest considerations, quite consistent with the role and mandate of the AUC. As such, it concluded that the UAD Decision was not unreasonable, but legitimate and well within the Commission’s legislative authority as a choice from a range of options.

4. The Supreme Court’s Review of the Prudence Doctrine

Whilst the ABCA was penning its FortisAlberta decision, Rothstein J was busy writing the Court’s unanimous decision in ATCO Pension, and the majority decision in OPG. In each of these cases that were heard together, the Court grappled with the prudence doctrine11, in the context of the regulatory disallowance of certain operating costs that the utilities sought to recover in rates.

In essence, the doctrine, or test, holds that in determining whether a utility’s costs are prudent, they are presumed to be so, and the determination should be made without the benefit of hindsight.

a. ATCO Pension

ATCO Pension concerned the same legislative schemes that were in issue in the ABCA’s UAD Decision, and the Commission’s decision to disallow certain pension costs claimed to be recovered in rates by the ATCO gas and electric utilities.

The Court first affirmed that the standard of review of an AUC decision to set rates under the Alberta utilities legislation is reasonableness.

The Court acknowledged that while the legislation recognized the principle of allowing utilities to recover their operating and capital costs in rates, provided they are prudent or reasonable, it rejected the argument of the utilities that the Commission had failed to properly address the prudence of the pension costs in issue.

It did so based on the way in which the current Alberta legislation uses the word ‘prudent,’ which neither implied any presumption nor required a no-hindsight approach, or any particular methodology. Indeed, given the statutory burden of proof on the utilities to demonstrate that their proposed rates are just and reasonable, they must also show that their costs are prudent or reasonable.

The Court was careful to reserve its opinion on whether a situation covered by the term “prudently incurred” might dictate the use of a particular no-hindsight methodology, as would a situation (such as that which prevailed to some extent in OPG, see below) where the costs in question were ‘committed’ or as spent. Equally, the Court noted that “there are undoubtedly situations in which a failure to apply a no-hindsight methodology may result in unjust outcomes for utilities and thus violate the statutory requirement that rates must strike a just and reasonable balance between consumer and utility interests…”12

But in this case, on this statutory language and dealing with forecast operating costs, the Court concluded that the AUC was free to consider a variety of tools to determine whether costs are prudent, provided that the ultimate rates it sets are just and reasonable, and the AUC’s conclusion – reached without benefit of the prudence test and in all of the circumstances – was not unreasonable.

Finally, in rejecting the contention that the AUC had been overly preoccupied with reducing rates, the Court affirmed that regulators can’t disallow prudent costs solely because they might lead to higher rates, and noted its conclusion in OPG that “the regulatory body ensures that consumers only pay for what is reasonably necessary.”

b. OPG

In OPG, the Ontario Energy Board (OEB) appealed a decision of the Ontario Court of Appeal which had set aside the OEB’s disallowance of certain labour compensation costs (which the Court classified as partly committed under collective agreements, and partly forecast).

First, the Court confirmed that the OEB had properly participated in the appeal, and that it had not sought to amend or vary or supplement – bootstrap – its original reasons for decision.

Under the relevant Ontario legislation, the Court found that while the prudent investment test is a valid tool that could be used in determining just and reasonable utility rates, the OEB was not bound to apply a particular prudence test in this case. As the utility was bound to establish that its rates were just and reasonable, neither did the legislation establish any presumption of prudence in its favour.

Rothstein J noted that the prudent investment test is not a mandatory feature of just and reasonable rates in the US, or Ontario, and contrasted the present situation with a scenario in which express statutory protection for the recovery of prudent investment costs is provided, thus making a no-hindsight prudent investment test a required feature of just and reasonable rates. When the test is not required by the particular scheme, but only that rates are just and reasonable, not using the test does not make the resulting decision on rates unreasonable.

Of note was the Court’s observation that the concept of just and reasonable rates captures the essential balance at the heart of regulation: the encouragement of robust investment in utility infrastructure and protecting consumer interests requires that utilities be allowed to earn their cost of capital over the long run.

Rothstein J specifically noted that depending on the circumstances, a prudence review could be important in ensuring that utilities are able to secure the requisite level of investment capital, and are not discouraged or ‘chilled’ from making the optimum level of investment in their facilities. However, given that operating costs were involved here, there was not, in the majority’s view, any danger of a chilling effect about incurring such costs in the future.

In her dissent, Abella J noted that the OEB had said it would evaluate the committed portion of the costs using a prudence review, but then ignored that method, including any presumption of prudence. Such regulatory uncertainty and moving targets would leave OPG unable to determine what to spend and invest, and as such, the OEB decision was unreasonable.

5. FortisAlberta – Leave Applications13

After the release of the OPG/ATCO Pension decisions, two leave applications were filed with the Court just prior to the end of 2015 in respect of FortisAlberta: the first by three electric utilities14, and the second by a combination of four gas and electric utilities.15 Each of the Commission and the Utility Consumer Advocate (UCA) have opposed the applications. As in all leave applications to the Court, the test is whether there is an issue of sufficient public, legal or national importance to warrant the Court’s intervention. It is not surprising that the parties disagree on whether this is the case; it is perhaps somewhat surprising that all of the parties rely on the ATCO Pension and OPG decisions.

a. Applicants’ Positions

In the AltaLink Application, the electric utilities argue that the Alberta Electric Utilities Act (EUA) embodies and enshrines the prudent cost recovery standard, consistent with the provincial policy to encourage and protect capital investment in infrastructure. Each of the AUC and ABCA erred in applying Stores Block and subsequent ABCA decisions to modify and override this clear legislative intent.

The ABCA UAD Decision also conflicts with ATCO Pension and OPG, and the right of the utilities to recover their prudently incurred costs, given the Alberta legislative regime. In other words, the Alberta legislative regime is one that includes what Rothstein J described as “express statutory protection”16 for the recovery of prudent investment costs.

The AltaGas Application makes many of the same points, and so far as ATCO Pension is concerned, argues that while there may be flexibility in the Alberta legislation concerning the manner in which the AUC determines just and reasonable electric utility rates, once a determination has been made that the costs in issue are prudent, a reasonable opportunity to recover those costs must be provided, given the clear legislative direction.

The problem with the UAD Decision and the ABCA’s affirmation of it, is that it establishes an “outright denial” of any opportunity for the recovery of any of the undepreciated costs of prudently acquired assets, if they are the subject of an extraordinary retirement, or at least dilutes that opportunity to the point of being unreasonable. In other words, the UAD Decision embeds the notion that the utility will always bear the risk of loss on those investments.

In each of the applications, an argument is also made that the Court’s guidance on the scope of reasonableness review is required. Acknowledging that the interpretation of the AUC’s home statute can be accorded deference, the argument is that the AUC’s interpretation of case law – Stores Block and its ‘progeny’ in the ABCA – and policy choices to override clear legislative intent concerning express statutory protections of cost recovery should not.

b. Respondents’ Positions

The AUC and UCA say that there is no question of sufficient public or national importance to warrant the granting of leave. There is evidence which supports the symmetry of risk established in Stores Block; the issues are Alberta-specific, as evidenced by the way in which other jurisdictions have already distinguished Stores Block and can be expected to deal similarly with the UAD Decision, in accordance with their own legislative schemes; varied treatment of stranded utility assets across the country is not a matter of national importance; and the Court has refused leave on key ABCA decisions extending the Stores Block principles.

i. AUC

The Commission says the question for the Court is: in setting rates for Alberta utilities, what is the appropriate treatment of the unrecovered portion of stranded assets that cease to be used prior to the end of their anticipated service life, for extraordinary reasons? And in response, the Commission says that the UAD Decision reasonably reflects the proper guidance that has been provided by Stores Block and the ABCA decisions, in the context of the Commission’s main function of setting rates.

Relying on ATCO Pension, and the ABCA UAD Decision, the AUC says it is clear that the preeminent principle under Alberta utility legislation is not the guaranteed recovery of prudent costs – which is in fact only a reasonable opportunity – but just and reasonable rates. The Alberta legislation doesn’t prescribe any specific method to determine just and reasonable rates, and provided that is the outcome, the AUC has a broad discretion to determine whether utility costs are prudent and variety of tools to do so.

Concerning the reasonableness standard of review, the AUC argues that varying the standard depending upon what the tribunal is interpreting – home statutes, case law or policy – would be at odds with Dunsmuir and is not warranted.

ii. UCA

The UCA echoes the AUC arguments made on the basis of ATCO Pension and the ABCA UAD Decision. As to the claim that under the UAD Decision, utilities will be denied outright any opportunity to recover stranded asset costs, the UCA refers to the AUC’s depreciation methodology, noting that the onus is on the utilities to justify their depreciation costs, and in the rare case that some element of those costs are disallowed, that is entirely consistent with the statutory requirement of a reasonable opportunity to recover costs.

The UCA rejects the argument that the reasonableness standard of review needs to be revisited, as the principles which guide its application are well-settled and not uncertain.

c. Applicants’ Replies

The electric utilities reply by suggesting that the UAD and ABCA decisions actually conflict with OPG and ATCO Pension, which distinguish operating and capital costs, and emphasize the importance of the opportunity to recover the latter. However, even though capital investment has already been found to be prudent, the effect of the UAD Decision is to deny recovery due to unforeseeable events.

They then focus on Stores Block and its progeny, noting that those decisions had nothing to do with ratemaking or electric utilities, and yet have been used to override clear legislative intent under the EUA in the UAD Decision, which itself had nothing to do with ratemaking, but was written to comply with a particular interpretation of Stores Block.

In reply to the AUC, AltaGas et al say that if the Stores Block principles were so fundamental as to have informed the UAD Decision, then their application can’t be limited to Alberta, especially since denying recovery of committed capital in utility assets raises obvious concerns across the country. With respect to OPG and ATCO Pension, AltaGas says that this case is not about the right methodology or test to evaluate prudence, but whether cost recovery in relation to assets already found to be prudent can be reasonably denied on the basis of case law that overrides clear legislative direction.

In reply to the UCA, AltaGas et al say that the case is not about “absolute guarantees” of recovery, but whether it is reasonable for the Stores Block principles to completely deny an opportunity to recover prudent costs, and whether that result is consistent with the conclusions in OPG and ATCO Pension that such an opportunity must be provided. On the depreciation point, AltaGas et al argue that this simply demonstrates the need for the Court to intervene: how can a mechanism used to ensure the recovery of prudent costs even beyond an ordinary retirement event be used as the basis for denying the recovery of similar costs in the event of an extraordinary retirement?

With all briefs now completed, a decision by the Court on these important applications may be expected sometime this spring.

6. What Next?

There are many difficult questions in and about Alberta these days, whether they concern the economy generally, the essentially anemic price of oil, job losses, or the seemingly ever-higher hurdles that impact the ability to deliver Alberta resources to markets, whether they be to the south, to the west, or to the east. The uncertainties are many, and palpable.

The ABCA’s UAD Decision and ATCO Pension appear to have eliminated some of the uncertainty and moved us closer to the end of the debate about who should bear the cost risk of stranded Alberta utility assets.

In respect of forecast Alberta utility operating costs, there would appear to be little doubt that the current legislation does not require the use of a specific methodology – the prudent investment test – to determine whether such costs may be included in just and reasonable rates. Whether that is the case for committed operating costs seems to be an open question.

And as disclosed by the OPG and ATCO Pension decisions and the briefs in the FortisAlberta leave applications, as it relates to committed capital investment costs which have already been found to be prudent, particularly where they are no longer available for utility service due to extraordinary events, there are clearly divergent views.

Will the Supreme Court see the need to assist in getting the asset disposition debate all the way across the finish line? If so, we will have some ways to go yet to get to the ‘end.’

If not – if Stores Block lives on, as interpreted by the ABCA – its UAD Decision will join the list of others in respect of which leave has been refused by the Supreme Court in this area, and the debate may well then be at an end – at least for the time being. If so, that may take us well back in time, to the vicinity of FPC v Hope Natural Gas Co. and the US Supreme Court’s conclusion that rates set by the FPC under a certain legislative scheme did not have to be based on a single specific method or formula, because the important and operative question to be answered is whether the total effect of the rate order, the result reached, was reasonable.17

And in that case, will there be a call for changes to Alberta’s utility legislation, as the ABCA alluded to in its UAD Decision? Will there be changes to the AUC’s depreciation methodology in light of that ‘end’, and at whose behest? Will there be occasion for the utilities to test the AUC assertion that it has the authority under its rate-making power to amend its depreciation methodology to fit the circumstance of a case in which it is claimed that the essential balance between robust utility investment and customer interests has been upset, unless the utility can recover the costs of a stranded asset?

*James Smellie is a senior partner in the Calgary office of Gowling Lafleur Henderson LLP, where he practices principally in the field of energy regulation. Any views expressed in this comment are his, and do not represent the opinion of his firm or any client of the firm.

  1. ATCO Gas & Pipelines Ltd v Alberta (Energy & Utilities Board), 2006 SCC 4, [2006] 1 SCR 140 [Stores Block].
  2. FortisAlberta Inc v Alberta (Utilities Commission) 2015 ABCA 295 [FortisAlberta or ABCA UAD Decision].
  3. AUC – Re: Utility Asset Disposition, Decision 2013-47 (26 November, 2013) [UAD Decision].
  4. Ontario (Energy Board) v Ontario Power Generation Inc, 2015 SCC 44 [OPG].
  5. ATCO Gas & Pipelines Ltd v Alberta (Utilities Commission), 2015 SCC 45 [ATCO Pension].
  6. ATCO Gas & Pipelines Ltd v Alberta (Energy & Utilities Board), 2008 ABCA 200, 433 AR 183 [Carbon].
  7. ATCO Gas & Pipelines Ltd v Alberta (Energy & Utilities Board)2009 ABCA 171, 454 AR 17 [Harvest Hill].
  8. ATCO Gas & Pipelines Ltd v Alberta (Utilities Commission), 2009 ABCA 246, 464 AR 275 [Salt Caverns I]; ATCO Gas & Pipelines Ltd v Alberta (Utilities Commission, 2014 ABCA 28, 566 AR 323 [Salt Caverns II].
  9. See James Smellie, “Alberta Utilities Asset Disposition Decision” (Summer 2014), 2 ERQ 196.
  10. FortisAlberta, supra note 2 at paras 143,168.
  11. See Gordon Kaiser, “The Prudence Doctrine Goes to the Supreme Court of Canada” (Summer 2014) 2 ERQ 205.
  12. ATCO Pension, supra note 5 at paras 46- 65.
  13. Section 5 is based on a review of the briefs filed by the parties in SCC Docket Nos. 36728 and 36730 between November 2015 and January 2016.
  14. AltaLink, ENMAX Power and EPCOR Distribution and Transmission [AltaLink Application].
  15. AltaGas Utilities, ATCO Gas & Pipelines, ATCO Electric and FortisAlberta [AltaGas Application].
  16. OPG, supra note 4 at para 96.
  17. FPC v Hope Natural Gas Co, (1944) 320 US 575. Sometimes called the “end-result” doctrine.

Leave a Reply