Calgary Power Ltd. v. City of Camrose, [1975] 2 SCR 465

Supreme Court of Canada

Calgary Power Ltd. v. City of Camrose [1975] 2 S.C.R. 465

Date: 1974-10-01

Calgary Power Ltd. Appellant;

and

City of Camrose Respondent.

1974: March 28, 29; 1974: October 1.

Present: Martland, Ritchie, Spence, Dickson and de Grandpré JJ.

ON APPEAL FROM THE SUPREME COURT OF ALBERTA, APPELLATE DIVISION

Public utilities—Water system in municipality owned by company—Application to Public Utilities Board to determine price—Valuation formula—Factors considered—The Municipal Government Act, R.S.A. 1970, c. 246, s. 272.

The appellant company owned and operated a water system in the City of Camrose since 1929 under various franchise agreements with the respondent city. The latest of these agreements, which was dated June 3, 1958, and ran for a term of 10 years, was not renewed. Before deciding whether or not to exercise its right to purchase the system, the city sought, as was also its right, to have the price fixed by the Public Utilities Board, the parties being unable to agree upon certain elements relating thereto. In determining the price to be paid, the Board applied the approved “reconstruction cost new” formula, a concept under which the assumption is taken that the present existing installation is instantaneously wiped out and at the date of the valuation a contractor is ready and able to rebuild a system identical in size, quality and performance to the one wiped out.

An appeal to the Appellate Division of the Supreme Court of Alberta from the Board’s decision raised the following issues: (a) whether the Board was right in allowing an item of $300,000 for the cost of cutting and replacing pavement in the areas affected, even though the evidence before the Board was that the pavement for which allowance was made did not exist historically at the time the various segments of the system were originally installed. The company had claimed an additional $194,584 in respect of this item; (b) whether the Board was correct in declining to deduct from the valuation of the system the amount of “customer contributions” (which arose where there was a “customer” available and willing to take service and the cost of installing that service

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exceeded $150 per customer) and “construction advances” (which arose in circumstances where there was no existing customer asking for service; for example, where a land developer wished to build a subdivision and to sell the houses later); (c) whether the Board was correct in refusing to make an allowance, in the valuation of the system, for preliminary organization expense, the cost of attaching customers and the cost of setting up books and records.

As to (a), the Court, by a majority of 2 to 1, rejected the city’s appeal. The company’s cross-appeal was rejected unanimously. As to (b), the Court, by a majority of 2 to 1, allowed the city’s appeal and referred the matter back to the Board for reconsideration. As to (c), the Court, by a majority of 2 to 1, allowed the company’s cross-appeal and referred the matter back to the Board for reconsideration.

The company appealed to this Court against the dismissal of its cross-appeal, under (a), and against the allowance of the city’s appeal under (b). The city cross-appealed from the dismissal of its appeal under (a) and from the allowance of the company’s cross-appeal under (c).

Held: The decision of the Public Utilities Board should be restored. The appeal and the cross-appeal, to the extent that they seek the restoration of that decision, should be allowed. The other items in the appeal and in the cross-appeal should be dismissed.

APPEAL and CROSS-APPEAL from a judgment of the Supreme Court of Alberta, Appellate Division[1].

J.H. Laycraft, Q.C., for the appellant.

A.O. Ackroyd, Q.C., for the respondent.

The judgment of the Court was delivered by

MARTLAND J.—This is an appeal and cross-appeal from a judgment of the Appellate Division of the Supreme Court of Alberta which dealt with an appeal and cross-appeal from some portions of the decisions of the Public Utilities Board of Alberta, hereinafter referred to as, “the Board”.

The appellant, hereinafter referred to as “the Company”, has owned and operated a water

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system in the City of Camrose since 1929 under various franchise agreements with the respondent City, hereinafter referred to as “the City”. The latest of these agreements is dated June 3, 1958, and ran for a term of 10 years. Clause 29 of the franchise agreement provides that the agreement is to be read subject to s. 410 of The City Act, R.S.A. 1955, c. 42 (since replaced by The Municipal Government Act, R.S.A. 1970, c. 246, s. 272). Section 272 of The Municipal Government Act provides that upon expiration of the term of the franchise agreement the City should have the right to purchase “all the rights of the contractor in all matters and things under the contract and in all apparatus and property used for the purposes thereof …” The provision also stipulates that if the parties are unable to agree upon the price and terms of the purchase then the purchase is to be made “for such price and on such terms as may be fixed and settled by the Public Utilities Board …”

The franchise agreement was not renewed and the City sought to have the price of the system fixed by the Board, the parties being unable to agree upon certain elements relating to the price.

The Board handed down a decision setting the price at $1,250,000 subject to such deductions as to “customer contributions” and “construction advances” as might be found to be applicable at the time the City actually applied for approval to purchase the system from the Company.

The parties then agreed that it would be desirable if a final definitive purchase price were established prior to the City deciding whether or not it desired to purchase the system, and accordingly the Board reconvened to hear further evidence on the question of the deductions above mentioned. The Board then issued a further decision dealing with this issue.

The franchise agreement provides that the Company is obligated “to furnish to the City and its inhabitants, in accordance with the terms

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of the Agreement, a supply of safe and wholesome water sufficient for the use of the City and all of the inhabitants thereof for domestic, business and public purposes within the City.” The Company is only required to extend its distribution system if:

(a) a customer or customers has agreed to install a water service from the property line to the customer’s premises and to take and pay for a supply of water for three years or more; and

(b) the length of the extension does not exceed 140 feet per customer; and

(c) a customer or customers has paid the construction costs in excess of $150 per customer on the basis of 4” diameter pipe …

“Construction advances” arise in circumstances where there is no existing customer asking for service; for example, where a land developer wishes to build a subdivision and to sell the houses later. There are thus no “customers” wishing service and the Company has no obligation to invest in the service facilities. In such circumstances the Company has contracted with developers on terms that the developer advances all construction costs. The Company then makes refunds to the developer as the houses are sold.

“Customer contributions” arise where there is a “customer” available and willing to take service and the cost of installing that service exceeds $150 per customer. In return for receiving services at the standard rates offered by the Company the customer makes a payment of a sum of money to the Company which is used to meet that part of the cost of the service facilities that lay outside economic bounds. Title to the facilities, part of the cost of which has been provided by the customer, vests in the Company. If more customers are subsequently attached to the original extension, part, or perhaps ultimately all, of the customer contributions in relation to the extension will be refunded.

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As of December 31, 1968, the Company held refundable “construction advances” of $23,732.25. It also held non-refundable “construction advances” of $36,112.14. As of the same date the Company held “customer contributions” of $35,793.92.

The Board stated the principles to be followed in determining the price to be paid by the City to the Company in the following passage in its decision:

The principles to be followed in determining the price which the City must pay if it wishes to purchase “all the rights of C.P. in all matters and things under the contract and in all apparatus and property used for the purposes thereof” were established by the Board in re City of Grande Prairie v. Northland Utilities Limited Decision No. 27014 (affirmed on appeal to the Appellate Division, Supreme Court of Alberta, (1966) 56 W.W.R. 613). In that decision the Board referred to the following authorities:

Town of Berlin v. Berlin and Waterloo Street Railway Company

(1909) 42 S.C.R. 581.

West Canadian Hydro Electric Corporation Limited

(1950) 3 D.L.R. 321.

Edinburgh Street Tramway Company v. The Lord Provost of Edinburgh

(1894) A.C. 456.

Hamilton Gas Company v. Hamilton

(1910) A.C. 300.

International Railway Company v. Niagara Parks Commission

(1937) 3 D.L.R. 305.

The Board then said:

“… it appears to the board that this is a case where only physical structures without any franchise, or statutory powers or other things necessary to earning capacity are being taken and accordingly reproduction cost is the test of value and consideration of earnings must be excluded.”

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In referring to reproduction cost new the Board, in that decision said:

“… in determining ‘reproduction cost new’. Under this concept the assumption is taken that the present existing installation is instantaneously wiped out and at the date of the valuation a contractor is ready and able to rebuild a system identical in size, quality and performance to the one wiped out.

Accordingly, therefore, the cost of materials would be the price that would be paid at the date of the valuation for quantities sufficient to reconstruct the system at that time.”

In reaching its first decision to fix the total price of the system at $1,250,000, one of the factors considered by the Board was that if the system had to be rebuilt today it would, in fact, be necessary to cut and replace pavement in the areas affected, even though the evidence before the Board was that the pavement for which allowance was made did not exist historically at the time the various segments of the system were originally installed. After hearing the evidence of both parties, the Board set $300,000 as the sum to be allowed for this factor. The Company had claimed an additional $194,584 in respect of this item.

In its second decision the Board determined that no amount should be deducted from the amount of $1,250,000 by reason of “customer contributions” or “construction advances”.

At the hearings before the Board the Company also claimed an allowance of $65,000 for organization and preliminary expenses, costs of attaching customers and costs of books and records. The Board rejected this claim.

With the requisite leave the City appealed from parts of the decision of the Board and the Company cross-appealed from other parts of the decision.

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The issues before the Appellate Division were stated by Allen J.A. as follows:

(a) Whether the Public Utilities Board (hereinafter referred to as “the Board”) was right in allowing an item of $300,000.00 for cost of breaking and replacement of pavement, not existing at the time when the water lines of Calgary Power Ltd. (hereinafter referred to as “the Company”) were originally laid, as an element of value of the Company’s system, and related to this, should the Board have disallowed part of the Company’s claim with respect to these costs, amounting to the sum of $194,584.00. The City appeals the finding of liability for the said amount of $300,000.00 and the Company cross-appeals against the disallowance of the balance of its claim in respect of this item.

(b) Whether the Board was correct in declining to deduct from the valuation of the system the amount of customer’s contributions and construction advances by developers. The City appeals this finding.

(c) Whether the Board was correct in refusing to make an allowance, in the valuation of the system, for preliminary organization expense, the cost of attracting [sic] customers and the cost of setting up books and records. The Company cross-appeals against this refusal.

The Court disposed of these issues as follows:

(a) By a majority of 2 to 1 the Court rejected the City’s appeal. The Company’s cross-appeal was rejected unanimously.

(b) By a majority of 2 to 1 the Court allowed the City’s appeal and referred the matter back to the Board for reconsideration.

(c) By a majority of 2 to 1 the Court allowed the Company’s cross-appeal and referred the matter back to the Board for reconsideration.

The Company appealed to this Court against the dismissal of its cross-appeal, under (a) above, and against the allowance of the City’s appeal under (b) above. The City cross-appealed from the dismissal of its appeal under (a) above

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and from the allowance of the Company’s cross-appeal under (c) above.

With respect to the first issue stated by Allen J.A., in para. (a), I am in agreement with the reasons of Johnson J.A. and Allen J.A. for holding that the Board properly included the $300, 000 item referred to in that paragraph. Johnson J.A., after referring to the formula used by the Board, in determining price, which had received the approval of the Appellate Division in the Northland Utilities case, points out that it excludes any allowance for the value of the system as a going concern, and goes on to say:

If this formula is to be used it should be applied with all its implications. Unlike boards that fix the rate of return, the Public Utilities Board, when using it in compulsory purchase cases, cannot consider any of the items that cannot be fitted into the cost of reconstruction new. While the cost of the cutting and replacing of sidewalks cannot be considered as compensation for these lost values, it is suggested that where a purely notional concept is used to determine values, there is no place for considerations that are quite unconnected with that concept. It is not concerned with who or under what considerations the original plant was constructed. It is solely concerned with the present cost of reproduction. To hark back to conditions existing when the pipe was originally laid is not applying this formula but is rather using what Bonbright calls “historical reproduction cost”. In my view the cutting and replacing of sidewalks is a part of the cost of the present reconstruction of the system and was properly included by the Board.

Allen J.A. says:

Although I can find no express statement in any case to that effect it seems to me that there is a difference in concept of values in such cases. In the rate cases the arbitrator is required to fix a fair rate of return to the utility company, which is a percentage by which the utility’s rate base is multiplied to determine “the wages of capital” (Priest-Public Utility Regulation Vol. 1. p. 191). The rate base on which a return may be earned is the amount of property

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“used and useful” at the time of the rate inquiry, in rendering a designated utility source (Priest at Vol. 1. p. 139 & cases cited).

In the acquisition cases what is properly taken into consideration in fixing value is the reconstruction cost new less depreciation on the assumption that the present existing installation is instantaneously wiped out and at the date of valuation a contractor is ready and able to rebuild a system equal in size, quality and performance to the original one.

The position of the City, which was accepted by McDermid J.A., was that the award of this item was not justifiable because it did not represent an actual outlay by the Company when the system was constructed. This position must rest upon the theory that the Company is only entitled to recover its historical cost. Historical cost is of importance in setting a rate base. Section 81(3) of The Public Utilities Board Act, R.S.A. 1970, c. 302, so provides:

(3) In determining a rate base under subsection (2), the Board shall give due consideration

(a) to the cost of the property when first devoted to public use, to prudent acquisition cost to the owner, less depreciation, amortization or depletion in respect of each, and

(b) to necessary working capital.

However, the present case is not concerned with the establishment of a rate base. It is concerned with the determination of a price in accordance with a formula which has received judicial approval. It is not a question of cost to the Company. It is a question of determining what would be the cost to the City to build a system equal in size, quality and performance to the one to be purchased and any cost requisite to achieve that object must be taken into account in determining the price to be paid for the existing system.

[Page 474]

I agree with the majority of the Appellate Division on this point.

With respect to the second point raised by the Company, referred to in para. (a), i.e., the reduction by the Board of the amount claimed by the Company in respect of this item, I see no reason to alter the unanimous decision of the Appellate Division.

Turning to para. (b) and the item of “construction advances”, I would adopt the view expressed by Johnson J.A. as follows:

After all, the property purchased by these advances is the property of the respondent and there is no reason why it should not be paid for. The Board decided that these were private contracts between the developer and the respondent and it had no jurisdiction respecting them. The respondent still has liability respecting lots that are not yet on service and the respondent cannot escape these even if the appellant assumed this liability.

I do not see why the price to be paid by the City for a Company asset should be affected because of the source from which the Company obtained the funds with which to pay for it.

With respect to “customer contributions”, the Board found that these were for the purpose of providing funds necessary to meet the deficiency in earnings which would result from the construction of an extension which, at the prevailing rates under the franchise, would provide insufficient revenue to meet the cost of supplying water to such customers.

I agree with the view expressed by Johnson J.A. on this point, as follows:

In determining that these sums are revenue, the Board was deciding a question of fact. There was evidence upon which this could be made and the sufficiency of such evidence is for the Board. We have no jurisdiction to direct that the Board should require further evidence. Even if the respondent in its books treated it otherwise it would not be estopped from showing that it was in fact revenue.

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The point raised in paragraph (c) is as to the right of the Company to claim from the City the sum of $65,000, representing:

The City’s right to purchase, as defined by the statute, and its obligation to pay, relates to “all the rights of the contractor (Company) in all matters and things under the contract and in all apparatus and property used for the purposes thereof”. The rights conferred by the franchise agreement were, briefly, an exclusive licence, for ten years, to lay down pipes, mains and conduits for conveying water within the City, to construct, maintain, repair and operate a water supply system, to sell and distribute water, with the privilege to enter on City streets and lanes to lay its pipes.

These are the rights referred to in the statutory power to purchase. In this context, it is my opinion that the word “property”, which is coupled with the word “apparatus”, refers to physical objects, and does not include those items in respect of which this claim was made. (See per Lord Macnaghten in Kingston Light, Heat & Power Company v. Corporation of Kingston[2].

This was the view of the Board, which had this to say concerning this claim:

There is no question that if the City elects to purchase the system it would be faced with the task of establishing books and records to record the operation of the system; entering into contracts with water users; and meeting such other expenses that may be necessary to establish the operation of the water utility. These expenses, in the Board’s view, are expenses usually associated with developing the utili-

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ty as a going concern and for which C.P., in a proceeding of this nature, is not entitled to be compensated for. The rights in all matters and things under the contract, as contemplated in the statute, must refer to the privilege granted by the City to C.P. which includes, among other things, the right, for a ten-year period, to lay down pipes in the streets and lanes of the City and for such purpose to make excavations, etc. At the end of the franchise period, unless a renewal is granted, these rights are at an end and their value to C.P. ceases to exist. The items claimed by C.P., totalling $65,000, are items associated with the operation of the rights conferred by the City under its contract with C.P. and which, upon the termination of the contract, are of little value to C.P. Accordingly, the Board has come to the conclusion that the $65,000 claimed by C.P. covers items which should not be taken into account in determining the price which the City is required to pay for the acquisition of the system at the termination of the franchise agreement.

Furthermore, as is pointed out by Johnson J.A., these items do not fit into the approved formula of awarding reconstruction costs new.

I would not allow this claim.

In the result, it is my view that the decision of the Public Utilities Board should be restored. The appeal and the cross-appeal, to the extent only that they seek the restoration of that decision, should be allowed. The other items in the appeal and in the cross-appeal should be dismissed. As success on both the appeal and the cross-appeal has been divided, I would not award costs to either party.

Judgment accordingly.

Solicitors for the appellant: Saucier, Jones, Peacock, Black, Gain, Stratton & Laycraft, Calgary.

Solicitors for the respondent: Liden, Ackroyd, Bradley, Philion, Piasta, Neuman & Elgert, Edmonton.