ATCO Gas and Pipelines Ltd v Alberta: Why You Are Paying More on Your Electricity Bill
In December of 2013, a damning Ontario Auditor General report zeroed in on Ontario Power Generator (“OPG”) and its executive compensation packages. The report accused OPG of unnecessarily driving up electricity prices through nepotism, high labour costs, and one of the province’s most generous public-sector pension plans in comparison to the Ontario Public Service as a whole. In response, the provincial government promised to clamp down on executive bonuses and reign in spending—but not much seems to have happened since then.
Electricity and heating bills are one of the largest items for a household budget. For the average Ontario family that has seen the price of daily life skyrocket, it is deeply disturbing to find out that their electricity bills make an allowance for executive compensation, staff pensions, and living allowances. This is not to say that workers should not have pensions or competitive salaries, but what is the line that needs to be drawn?
Fortunately, provincial governments have created institutions that seek to protect consumers and ratepayers. In Ontario, the Ontario Energy Board (“OEB”) regulates energy generating companies and rate increases. In Alberta, the Alberta Utilities Commission (“Commission”) is in charge of setting just and reasonable tariffs for electricity and gas utilities seeking recovery from ratepayers for their prudent costs. Both provinces had cases before the Supreme Court of Canada (“SCC”) this year dealing with the same issue, namely, what companies are allowed to recover through increases in rates.
In Ontario (Energy Board) v Ontario Power Generation, 2015 SCC 44 [Ontario Energy Board] the SCC ruled that the OEB properly denied OPG its rate hike because it was not just and reasonable (for a discussion on the Ontario Energy Board decision, see John Mastrangelo’s case comment here).
In ATCO Gas and Pipelines v Alberta (Utilities Commission), 2015 SCC 45 [ATCO Gas] the SCC looked at whether the relevant statutory framework imposes upon the Commission the “prudence” methodology when approving rate increases and it found that it did not. This decision is another victory for ratepayers because it is the utilities company that will have to demonstrate that costs are prudent, instead of having the Commission carry the burden of proof.
ATCO Gas and Pipelines (“ATCO”) is no stranger to challenging Commission rulings. Most recently, in 2011, the Commission denied ATCO recovery in the form of approved rates for some pensions costs for 2012 (ATCO Gas, para 17). Instead of approving recovery for an adjustment of 100 percent of the annual consumer price index (“CPI”), the Commission only approved recovery for 50 percent of the CPI (ATCO Gas, para 1). The Commission found that the practice of awarding 100 percent of consumer price index for every year was not in keeping with the practices of other defined benefit pension plans among other entities in a comparator group (ATCO Gas, para 19).
ATCO challenged the Commission’s decision. The Alberta Court of Appeal dismissed the ATCO’s challenge. Conducting a reasonableness review, the court held that it was open to the Commission to reduce ATCO’s revenue requirement to reflect 50 percent of CPI instead of 100 percent (Atco Gas and Pipelines Ltd v Alberta (Utilities Commission), 2013 ABCA 310).
Before the SCC, ATCO argued that the Commission is bound to assess costs for prudence, and that prudently incurred costs must be approved (ATCO Gas, para 3). The implication is that, in the absence of an explicit contrary finding, costs are presumed to be prudent and that prudence is to be established based on circumstances as of the date of the cost decision (ATCO Gas, para 3).
The Commission argued that there is no obligation on the Commission to tie it to a particular prudence test but also that there is no presumption of prudence (ATCO Gas, para 4). This view would shift the onus on the utility company to demonstrate that the rate it proposes is reasonable instead of taking it for granted.
Who Has the Burden of Proof?
In Canada, “just and reasonable” rates are those that are fair to both consumers and the utility. This principle recognizes the fact that recovering costs ensures that the utility can continue to operate (ATCO Gas, para 7). In Alberta, The Electric Utilities Act (“EUA”) requires the Commission to have “regard for the principle that a tariff approved by it must provide the owner of an electricity utility with a reasonable opportunity to recover” (Electric Utilities Act, SA 2003, c E-5.1, s 122). ATCO argued that EUA’s express use of the word “prudent” mandates the use of the no-hindsight test as established by the Ontario Court of Appeal (“ONCA”) in Power Workers’ Union (Canadian Union of Public Employees, Local 1000) v Ontario (Energy Board), 2013 ONCA 359 [Power Workers’ Union].
In Power Workers’ Union, the ONCA confirmed that:
- Decisions made by the utility’s management should generally be presumed to be prudent unless challenged on reasonable grounds.
- To be prudent, a decision must have been reasonable under the circumstances that were known or ought to have been known to the utility at the time the decision was made.
- Hindsight should not be used in determining prudence, although consideration of the outcome of the decision may legitimately be used to overcome the presumption of prudence.
- Prudence must be determined in a retrospective factual inquiry, in that the evidence must be concerned with the time the decision was made and must be based on facts about the elements that could or did enter into the decision at the time (Power Workers’ Union, para 16).
The SCC looked at the meaning of the word “prudence” in the context of EUA. It found that absent a definition of the word “prudent” or a clear inference that it refers to a non-hindsight rule, this prudence requirement is to be understood in the sense of the ordinary meaning of the word which means that the costs must be wise or sound in order to be warranted recovery through rates (ATCO Gas, para 38). Further, the SCC ruled that section 121(4) of the EUA provides that the burden of establishing that the proposed tariffs are just and reasonable falls on the public utility (ATCO Gas, para 42). The reasonableness standard of review thus allows the Commission to apply its expertise to determine whether costs are prudent. The standard of review also gives the Commission the discretion to consider a variety of analytical tools and evidence in making that determination so long as the ultimate rates that it sets are just and reasonable to both consumers and the utility (ATCO Gas, para 47).
Investors v Consumers
Courts and governments have recognized the need to balance the interests of investors and those of consumers. From an administrative law prospective, Canadian courts have given a great degree of deference to regulators and boards, not only in decisions, but also on how they interpret the statutes that they are in charge of administering.
ATCO Utilities was asking for a recovery of $157 million in pension-related costs from ratepayers. These costs included a cost of living allowance that was set each year from a third-party administrator. Although it is true that the rate increase on ratepayers would not have been extremely high, the SCC sent an important message about the power of regulating bodies. Regulators have the power to exercise considerable discretion when analyzing rate increases. Utilities are likely to argue that they need to keep their benefits and wages competitive in order to attract talent. True as that may be, this should not allow utilities carte blanche in passing on expenses to ratepayers.