SUPREME
COURT OF CANADA
Between:
ATCO
Gas and Pipelines Ltd. and ATCO Electric Ltd.
Appellants
and
Alberta
Utilities Commission and
Office
of the Utilities Consumer Advocate of Alberta
Respondents
Coram: McLachlin C.J. and Abella, Rothstein, Cromwell, Moldaver, Karakatsanis
and Gascon JJ.
Reasons
for Judgment:
(paras. 1 to 66)
|
Rothstein J. (McLachlin C.J. and Abella,
Cromwell, Moldaver, Karakatsanis and Gascon JJ. concurring)
|
ATCO
Gas and Pipelines Ltd.
v. Alberta (Utilities Commission), 2015 SCC 45, [2015] 3 S.C.R.
219
ATCO Gas and Pipelines Ltd. and
ATCO Electric Ltd. Appellants
v.
Alberta Utilities Commission and
Office of the Utilities
Consumer Advocate of Alberta Respondents
Indexed as: ATCO Gas and
Pipelines Ltd. v. Alberta
(Utilities Commission)
2015 SCC 45
File No.: 35624.
2014: December 3; 2015: September 25.
Present: McLachlin C.J. and Abella, Rothstein, Cromwell,
Moldaver, Karakatsanis and Gascon JJ.
on appeal from the court of appeal for alberta
Public utilities — Gas — Electricity — Rate‑setting
decision by utilities regulator — Utilities seeking to recover pension costs in
utility rates set by Alberta Utilities Commission — Whether regulatory
framework prescribes certain methodology in assessing whether costs are prudent
— Whether Commission’s interpretation and exercise of its rate‑setting
authority was reasonable — Electric Utilities Act, S.A. 2003, c. E‑5.1,
ss. 102, 121, 122 — Gas Utilities Act, R.S.A. 2000, c. G‑5,
s. 36.
The
Alberta Utilities Commission denied the request by ATCO Gas and Pipelines Ltd.
and ATCO Electric Ltd. (the “ATCO Utilities”) to recover, in approved rates,
certain pension costs related to an annual cost of living adjustment (“COLA”)
for 2012. Instead of approving recovery for an adjustment of 100 percent
of annual consumer price index (“CPI”) (up to a maximum COLA of 3 percent),
the Commission ruled that recovery of only 50 percent of annual CPI was
reasonable. The Alberta Court of Appeal dismissed the ATCO Utilities’ appeal
from the decision of the Commission.
Held:
The appeal should be dismissed.
A
key principle in Canadian regulatory law is that a regulated utility must have
the opportunity to recover its operating and capital costs through rates. This
requirement is reflected in the Electric Utilities Act and the Gas
Utilities Act of Alberta, as these statutes refer to a reasonable
opportunity to recover costs and expenses so long as they are prudent. The Commission
must therefore determine whether a utility’s costs warrant recovery on the
basis of their reasonableness — or, under the Electric Utilities Act and
the Gas Utilities Act, their “prudence”. Where costs are determined to
be prudent, the Commission must allow the opportunity to recover them through
rates.
The
prudence requirement is to be understood in the sense of the ordinary meaning
of the word: for the listed costs and expenses to warrant a reasonable
opportunity of recovery, they must be wise or sound; in other words, they must
be reasonable. Nothing in the ordinary meaning of the word “prudent” or the use
of this word in the statute as a stand‑alone condition says anything
about the time at which prudence must be evaluated. Thus, neither the ordinary
meaning of “prudent” nor the statutory language indicate that the Commission is
bound by the legislative provisions to apply a no‑hindsight approach to
the costs at issue, nor is a presumption of prudence statutorily imposed in
these circumstances. In the context of utilities regulation, there is no
difference between the ordinary meaning of a “prudent” cost and a cost that
could be said to be reasonable. It would not be imprudent to incur a reasonable
cost, nor would it be prudent to incur an unreasonable cost. Further, the
burden of establishing that the proposed tariffs are just and reasonable falls
on public utilities, which necessarily imposes on them the burden of
establishing that the costs are prudent. The impact of increased rates on
consumers cannot be used as a basis to disallow recovery of such costs. This is
not to say that the Commission is not required to consider consumer interests. These
interests are accounted for in rate regulation by limiting a utility’s recovery
to what it reasonably or prudently costs to efficiently provide the utility
service. That is, the regulatory body ensures that consumers only pay for what
is reasonably necessary.
Though
the Electric Utilities Act and the Gas Utilities Act do contain
language allowing for the recovery of “prudent” costs, the statutes do not
explicitly impose an obligation on the Commission to conduct its analysis using
a particular methodology any time the word “prudent” is used. Thus, the
Commission is free to apply its expertise to determine whether costs are
prudent (in the ordinary sense of whether they are reasonable), and it has 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.
The
standard of review of the Commission’s decision in applying its expertise to
set rates and approve payment amounts is reasonableness. Under this standard of
review, the Commission’s interpretation of its home statute is entitled to
deference. In this case, it was not unreasonable for the Commission to decide,
without applying a no‑hindsight analysis, that 50 percent of CPI (up
to a maximum COLA of 3 percent) represented a reasonable level for setting
the COLA amount for the purposes of determining the pension cost amounts for
regulatory purposes: the Commission was not statutorily bound to apply a
particular methodology to the costs at issue in this case; the use of the word
“prudent” in the Electric Utilities Act and the Gas Utilities Act
cannot by itself be read to impose upon the Commission a specific no‑hindsight
methodology; and the disallowed costs were forecast costs. Accordingly, it was
reasonable for the Commission to evaluate the ATCO Utilities’ proposed revenue
requirement in light of all relevant circumstances. Further, because the
Commission did not use impermissible methodology, it was not unreasonable for
the Commission to direct the ATCO Utilities to reduce their pension costs
incorporated into revenue requirements by restricting the annual cost of living
adjustment.
Cases Cited
Referred
to: Ontario (Energy Board) v. Ontario Power Generation Inc., 2015
SCC 44, [2015] 3 S.C.R. 147; Northwestern Utilities Ltd. v. City of Edmonton,
[1929] S.C.R. 186; Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R.
190; ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities Board),
2006 SCC 4, [2006] 1 S.C.R. 140; Shaw v. Alberta Utilities Commission,
2012 ABCA 378, 539 A.R. 315; ATCO Gas and Pipelines Ltd. v. Alberta
Utilities Commission, 2009 ABCA 246, 464 A.R. 275; Alberta (Information
and Privacy Commissioner) v. Alberta Teachers’ Association, 2011 SCC 61,
[2011] 3 S.C.R. 654; Power Workers’ Union, Canadian Union of Public
Employees, Local 1000 v. Ontario Energy Board, 2013 ONCA 359, 116 O.R. (3d)
793; Enbridge Gas Distribution Inc. v. Ontario Energy Board (2006), 210
O.A.C. 4; McLean v. British Columbia (Securities Commission), 2013 SCC
67, [2013] 3 S.C.R. 895; Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R.
27; TransCanada Pipelines Ltd. v. National Energy Board, 2004 FCA 149,
319 N.R. 171.
Statutes and Regulations Cited
Electric Utilities Act, S.A. 2003,
c. E‑5.1, ss. 102, 121, 122.
Employment Pension Plans Act, R.S.A.
2000, c. E‑8, ss. 13, 14, 48(3).
Employment Pension Plans Act, S.A. 2012,
c. E‑8.1, ss. 13, 35(2), 52(2)(b).
Employment Pension Plans Regulation,
Alta. Reg. 35/2000, ss. 9, 10, 48(3).
Employment Pension Plans Regulation,
Alta. Reg. 154/2014, ss. 48, 49, 60(2)(b), (3).
Gas Utilities Act, R.S.A. 2000, c. G‑5,
ss. 36, 37(3), 44(1), (3).
Ontario Energy Board Act, 1998, S.O.
1998, c. 15, Sch. B.
Roles, Relationships and Responsibilities Regulation, Alta. Reg. 186/2003, s. 4(3).
Authors Cited
Concise Oxford English Dictionary, 12th
ed., by Angus Stevenson and Maurice Waite, eds. Oxford: Oxford University
Press, 2011, “prudent”.
Driedger, Elmer A. Construction of Statutes, 2nd ed.
Toronto: Butterworths, 1983.
Merriam‑Webster’s Collegiate Dictionary, 11th ed. Springfield, Mass.: Merriam‑Webster, 2003,
“prudent”.
Oxford English Dictionary, 2nd ed.
Oxford: Clarendon Press, 1989, “prudent”.
Reid, Laurie, and John Todd. “New Developments in Rate Design for
Electricity Distributors”, in Gordon Kaiser and Bob Heggie, eds., Energy Law
and Policy. Toronto: Carswell, 2011, 519.
APPEAL
from a judgment of the Alberta Court of Appeal (Costigan, Martin and
Slatter JJ.A.), 2013 ABCA 310, 93 Alta. L.R. (5th) 234, 556 A.R. 376, 584
W.A.C. 376, 7 C.C.P.B. (2d) 171, [2013] A.J. No. 989 (QL), 2013
CarswellAlta 1984 (WL Can.), affirming a decision of the Alberta Utilities
Commission, [2011] A.E.U.B.D. No. 506 (QL), 2011 CarswellAlta 1646 (WL
Can.). Appeal dismissed.
John N. Craig, Q.C., Loyola G.
Keough and E. Bruce Mellett, for the appellants.
Catherine M. Wall and Brian C. McNulty, for the respondent the Alberta Utilities Commission.
Todd A. Shipley, C. Randall McCreary, Michael Sobkin and Breanne Schwanak, for the respondent the Office of the Utilities Consumer Advocate of Alberta.
The
judgment of the Court was delivered by
[1]
Rothstein J. — In its decision of September 27, 2011, the
Alberta Utilities Commission denied the request by ATCO Gas and Pipelines Ltd.
and ATCO Electric Ltd. (collectively the “ATCO Utilities”) to recover, in
approved rates, certain pension costs related to an annual cost of living
adjustment (“COLA”) for 2012. Instead of approving recovery for an adjustment
of 100 percent of the annual consumer price index (“CPI”) (up to a maximum COLA
of 3 percent), the Commission ruled that recovery of only 50 percent of annual
CPI (up to a maximum COLA of 3 percent) was reasonable. The Alberta
Court of Appeal dismissed the ATCO Utilities’ appeal from the decision of the Commission.
The ATCO Utilities now appeal to this Court.
[2]
This matter was heard together with Ontario (Energy Board) v.
Ontario Power Generation Inc., 2015 SCC 44, [2015] 3 S.C.R. 147 (“OEB”),
which also concerns the review of a rate-setting decision by a utilities
regulator. Although the facts of the cases are different, both involve issues
of methodology, and, in particular, when — if ever — a regulator is required to
apply a particular regulatory tool known as the “prudent investment test” in
assessing a utility’s costs.
[3]
The ATCO Utilities submit that the Commission is bound to first
assess costs put forward by a utility for prudence, and that prudently incurred
costs must be approved for inclusion in the utility’s “revenue requirement”.
This term refers to “the total revenue that is required by the
company to pay all of its allowable expenses and also to recover all costs
associated with its invested capital”: L. Reid and J. Todd, “New Developments
in Rate Design for Electricity Distributors”, in G. Kaiser and B. Heggie, eds.,
Energy Law and Policy (2011), 519, at p. 521. The approved
revenue requirement is then to be allocated to customers in the form of just
and reasonable rates. The ATCO Utilities argue that the
Commission failed to properly address the prudence of such costs. They say that
in the absence of an explicit contrary finding, costs are presumed to be
prudent. Further, the ATCO Utilities assert that prudence is to be established
based on circumstances as of the date of the cost decision — not based on
hindsight and the use of information not available to the utility when the
decision to incur the cost was made.
[4]
The Office of the Utilities
Consumer Advocate of Alberta argues that the Alberta regulatory framework does
not impose a specific rate-setting methodology on the Commission; it falls to
the Commission to decide upon the specific test and methodology to employ.
Specifically, the Consumer Advocate argues that there is no obligation on the
Commission to utilize a particular prudence test methodology when reviewing
costs on a forecast basis. Nor is there a presumption of prudence. On the
contrary, the onus is on the utility to demonstrate that the tariff it proposes
is just and reasonable.
[5]
As in OEB, the relevant statutory framework does not
impose upon the Commission the “prudence” methodology urged by the ATCO
Utilities. Further, following the approach set out in OEB, the
methodology adopted by the Commission and its application of this methodology
were reasonable in view of the nature of the costs in question. I would dismiss
the appeal.
I.
Regulatory Framework
[6]
In Alberta, the Commission sets “just and reasonable” tariffs for
electric and gas utilities seeking recovery of their prudent costs and
expenses: s. 121(2)(a) of the Electric Utilities Act, S.A. 2003, c.
E-5.1 (“EUA”); and s. 36(a) of the Gas Utilities Act, R.S.A.
2000, c. G-5 (“GUA”).
[7]
In Canadian law, “just and reasonable” rates or tariffs are those
that are fair to both consumers and the utility: Northwestern Utilities Ltd.
v. City of Edmonton, [1929] S.C.R. 186, at pp. 192-93, per Lamont J. Under
a cost of service model, rates must allow the utility the opportunity to
recover, over the long run, its operating and capital costs. Recovering these
costs ensures that the utility can continue to operate and can earn its cost of
capital in order to attract and retain investment in the utility: OEB,
at para. 16. Consumers must pay what the Commission “expects it to cost to
efficiently provide the services they receive” such that, “overall, they are
paying no more than what is necessary for the service they receive”: OEB,
at para. 20.
II.
Facts
A.
The Pension Plan
[8]
Employees of the ATCO Utilities benefit from the Retirement Plan
for Employees of Canadian Utilities Limited (“Canadian Utilities”), the parent
company of the ATCO Utilities, and Participating Companies (the “Pension
Plan”). The Pension Plan is administered by Canadian Utilities, which is not
itself regulated by the Commission. As the Pension Plan administrator, Canadian Utilities acts in a
fiduciary capacity in relation to Plan members and other Plan beneficiaries: s.
13(5) of the Employment Pension Plans Act, R.S.A. 2000, c. E-8.
[9]
The Pension Plan includes a defined benefit plan
(the “DB plan”), which was closed to new employees on January 1, 1997, and a
defined contribution plan. The COLA applies only to the DB plan. The Employment
Pension Plans Act requires that the DB plan be subject to actuarial
calculations filed periodically with the Superintendent of Pensions for
Alberta: ss. 13 and 14;
and ss. 9 and 10 of the Employment Pension Plans Regulation, Alta. Reg.
35/2000.
Actuarial calculations determine, inter alia, the contributions that an
employer must make to cover a DB plan’s liabilities.
[10]
The assets of the Canadian Utilities Pension
Plan are pooled between all Canadian Utilities member companies, regardless of
whether they are regulated utility companies (like the ATCO Utilities) or not.
The required employer funding is determined on an aggregate basis. If special
payments must be made to address unfunded liabilities, the aggregate funding
requirement is apportioned among the member entities of the Pension Plan.
[11]
No employer contributions to the
Pension Plan were required between 1996 and the end of 2009 because the Pension
Plan was in surplus position, and thus the ATCO Utilities did not have to
include such contributions in their revenue requirement applications to the
Commission. In the wake of the 2008 financial crisis, the market value of the
Pension Plan’s assets dropped and a large unfunded liability resulted, forcing
the employers participating in the Pension Plan, including the ATCO Utilities,
to resume making employer contributions in 2010.
B.
The Pension Plan Funding Obligations
[12]
Section 48(3) of the Employment Pension Plans
Act (2000)
requires that the Pension Plan be funded in accordance with actuarial valuation
reports. The actuarial valuation report relevant to this appeal (the “2009
Actuarial Report”) was filed with the Superintendent of Pensions for Alberta on
June 29, 2010 by Mercer (Canada) Limited, the Pension Plan’s actuary. The
report indicated that two types of payments were required. First, it determined
the estimated payments required to address the projected benefits owed
to beneficiaries for 2010, 2011 and 2012. These are also called “current
service costs”. Second, it determined that the DB plan had an
unfunded liability of $157.1 million across all Canadian Utilities entities,
requiring all the employers participating in the Pension Plan, including the
ATCO Utilities, to make minimum annual special payments in the aggregate amount
of $16.4 million until December 31, 2024 to address the liability. The ATCO
Utilities alone were liable for approximately $13.9 million of the annual
aggregate special payment amount.
[13]
The cost of living adjustment issues in this
case involve both the contributions that the ATCO Utilities must make into the
DB plan and the benefits paid to retirees out of the plan. With regard to the
ATCO Utilities’ contributions into the plan, the 2009 Actuarial Report included
a provision for “post retirement pension increases” that is based on the DB
plan’s COLA formula and the actuarial report’s assumption for inflation. This
provision affects the payments that the ATCO Utilities are required to make
into the DB plan for the three-year period covered by the report. In this case,
this increase was 2.25 percent per year for all three years.
[14]
With regard to the payment of benefits to
retirees under the DB plan, the ATCO Utilities’ parent company Canadian
Utilities sets the COLA annually. Sections 6.9(a) and 6.12(a) of the DB plan
prescribe that Canadian Utilities determines the COLA by taking into
consideration annual percentage changes in the CPI for Canada and any previous
adjustments paid. These provisions cap the adjustment set by Canadian Utilities
at 3 percent per annum.
III.
Decisions Below
A.
Alberta Utilities Commission: ATCO Utilities, Re
(2010), 84 C.C.P.B. 89 (“Decision 2010-189”)
[15]
On July 10, 2009, the ATCO Utilities filed an application with
the Commission to determine, inter alia, the amount of employer pension
contributions that would be included in their revenue requirements in 2010. The
ATCO Utilities’ proposed contributions reflected a COLA set at 100 percent of
annual Canada CPI (up to a maximum of 3 percent), as Canadian Utilities had
used for a number of years. However, in the Commission’s view, setting COLA at
100 percent of CPI year after year was not required by the wording of the
Pension Plan. It concluded “that ratepayers should not bear
any incremental pension funding costs” that arise from Canadian Utilities’
practice of setting COLA “where it [was] demonstrated that such incremental
costs prove to be unreasonable or imprudent in the circumstances”: para. 118.
[16]
However, the Commission did not find the
evidence filed in this application to be sufficient to draw conclusions with
respect to whether the COLA was prudent. As a result, it did not reduce the
COLA of 100 percent of annual CPI (up to a maximum of 3 percent) for the ATCO
Utilities’ 2010 revenue requirements. Nonetheless, the Commission stated that
it “would like to investigate the possibility of adjusting COLA as a mechanism
in prudently managing utility pension expense” for the years 2011 onward: para.
123. It directed the ATCO Utilities to prepare a 2011 pension common matters
application to address issues related to COLA and Canadian Utilities’
discretion in setting COLA.
B.
Alberta Utilities Commission: 2011 CarswellAlta
1646 (WL Can.) (“Decision 2011-391”)
[17]
On December 15, 2010, the ATCO Utilities filed a pension common
matters application pursuant to the Commission’s direction in Decision
2010-189. The Commission published its Decision 2011-391 on
September 27, 2011. It is this decision that is the subject of appeal in this
Court.
[18]
In reviewing the COLA included in the ATCO Utilities’ revenue
requirement application, the Commission wrote that the
reasonableness of setting it at 100 percent of CPI had to be evaluated “in the
circumstances applicable at the time that ATCO Utilities apply to include
pension expense in revenue requirement”: Decision 2011-391, at para. 87.
The significant unfunded liability of the Pension Plan was such a circumstance.
The Commission was of the view that the DB plan permitted Canadian Utilities to
exercise its discretion in setting the COLA, and that this discretion was “an
available tool” for Canadian Utilities to actively manage the DB plan unfunded
liability as it carried out its fiduciary and contractual obligations: para.
83. “[T]he availability of that discretion and the exercise, or lack thereof,
of that discretion [was] a relevant and material consideration” in determining
whether the ATCO Utilities’ pension expenses were reasonable and should be
included in revenue requirements: ibid.
[19]
The Commission found that the ATCO Utilities’
practice of awarding an annual COLA of 100 percent of CPI every year was not
“an acceptable standard practice”, in light of benchmark evidence showing a
wider range of COLA percentages used by defined benefit pension plans among
other entities in a comparator group: Decision 2011-391, at para. 87.
The majority of these other entities set COLA between 50 percent and 75 percent
of CPI. The Commission also found that a reduction in COLA would not undermine ATCO
Utilities’ ability to attract new employees, nor would it encourage current
employees to leave.
[20]
The Commission concluded that the COLA included
in current service costs to be
recovered through tariffs after January 1, 2012 and until the next actuarial
valuation should be 50 percent of the annual Canada CPI, to a maximum of 3
percent. The ATCO Utilities’ revenue requirements for 2012 were to be reduced accordingly.
[21]
However, with regard to the special payments addressing the
unfunded liability for 2012, the Commission stated that it would not require
that the ATCO Utilities file an updated actuarial report reflecting a lower
COLA and that it would only begin disallowing a COLA of 100 percent of CPI with
regard to special payment costs from 2013 onward. This decision resulted from
the Commission’s conclusion that filing a new actuarial report “would be
costly, and consume an undue amount of company, intervener and Commission
resources given the time remaining in 2011 to complete a new report and file it
for approval with the Commission and subsequently with the Superintendent of
Pensions”, especially as a new report would be filed by January 1, 2013 as it stood:
Decision 2011-391, at para. 99. The Commission did not reduce special
payments to be recovered in 2012 because it was not “in the best interest of
ATCO Utilities, ratepayers or pensioners to implement a change to the COLA
calculation [at this time] given the uncertain pension funding impacts that may
result from a new actuarial valuation and report”: para. 100. Reductions in
liability as a result of a reduction of COLA would be captured in ongoing
special payments set for 2013 onward.
C.
Alberta Utilities Commission: ATCO Utilities, Re (2012), 97
C.C.P.B. 298 (“Decision 2012-077”)
[22]
On November 2, 2011, the ATCO Utilities filed a review and
variance application of Decision 2011-391. The ATCO Utilities requested
that the Commission vacate its direction to reduce the amount of COLA to 50
percent of CPI for regulatory purposes.
[23]
The Commission found that the arguments raised by the ATCO
Utilities did not give rise to a substantial doubt as to the correctness of Decision
2011-391 and denied the ATCO Utilities’ request for review and
variance.
D.
Alberta Court of Appeal: 2013 ABCA 310, 93 Alta.
L.R. (5th) 234
[24]
The Alberta Court of Appeal granted leave to
appeal Decision 2011-391. Conducting a reasonableness review, the court held it was open to
the Commission to reduce the ATCO Utilities’ revenue requirements to reflect a
COLA of 50 percent of CPI. The Court of Appeal dismissed ATCO Utilities’
appeal.
IV.
Issues
[25]
This appeal raises three issues:
1. What is the standard of review?
2. Does the regulatory framework
prescribe a certain methodology in assessing whether costs are prudent?
3. Was it reasonable for the
Commission to refuse to incorporate 100 percent of CPI to a maximum of 3
percent into the ATCO Utilities’ COLA revenue requirements?
V.
Analysis
A.
Standard of Review
[26]
The standard of review of the Commission’s
decision in applying its expertise to set rates and approve payment amounts in
accordance with the Electric Utilities Act and the Gas Utilities Act is
reasonableness: OEB, at para. 73; see Dunsmuir v. New Brunswick,
2008 SCC 9, [2008] 1 S.C.R. 190, at paras. 53-54.
[27]
Nonetheless, the ATCO Utilities argue that the
jurisprudence favours applying a standard of correctness. However, the cases
they cite — ATCO Gas and Pipelines Ltd. v. Alberta (Energy and Utilities
Board), 2006 SCC 4, [2006] 1 S.C.R. 140 (“Stores Block”), Shaw v.
Alberta Utilities Commission, 2012 ABCA 378, 539 A.R. 315, and ATCO Gas
and Pipelines Ltd. v. Alberta Utilities Commission, 2009 ABCA 246, 464 A.R.
275 — are not analogous to the matter at hand. They each were said to involve
“true questions of jurisdiction”, where the regulator was called on to
determine whether it had the statutory authority to decide a particular
question. This Court’s recent jurisprudence has emphasized that true questions of
jurisdiction, if they exist as a category at all, an issue yet unresolved by
the Court, are rare and exceptional: Alberta (Information and Privacy
Commissioner) v. Alberta Teachers’ Association, 2011 SCC 61, [2011] 3
S.C.R. 654, at para. 34. In any event, this case involves ratemaking. As
Bastarache J. noted in Stores Block, ratemaking is at the heart of a
regulator’s expertise and is therefore deserving of a high degree of deference:
para. 30.
[28]
To the extent that an appeal also turns on the
Commission’s interpretation of its home statutes, a standard of reasonableness
also presumptively applies: Alberta Teachers’ Association, at para. 30.
The presumption is not rebutted in this case.
B.
Methodology for Determining Costs and Just and
Reasonable Rates Under the Electric Utilities Act and the Gas Utilities Act
[29]
The application by the ATCO Utilities, one of
which is an electric utility and the other a gas utility, involves both the EUA
and the GUA. Both statutes direct the Commission to set just and
reasonable rates. The EUA requires the Commission to “have regard for
the principle that a tariff approved by it must provide the owner of an
electric utility with a reasonable opportunity to recover” various “prudent” or
“prudently incurred” costs: s. 122; see also s. 102. A gas utility, on the
other hand, is “entitled to recover in its tariffs” costs that the Commission
determines to be “prudent”: s. 4(3) of the Roles, Relationships and
Responsibilities Regulation, Alta. Reg. 186/2003 (“RRR Regulation”);
see also s. 36 GUA.
[30]
The ATCO Utilities argue that the guarantee of a
reasonable opportunity to recover their costs requires that the Commission must
first examine whether the decisions to incur costs were prudent and must apply
a presumption of prudence in favour of the utility. Unless these costs are
found not to be prudent, they are to be included in the utility’s revenue
requirement. The ATCO Utilities say that in conducting its prudence inquiry,
the Commission is required to use the prudence test as described by the Ontario
Court of Appeal in Power Workers’ Union, Canadian Union of Public Employees,
Local 1000 v. Ontario Energy Board, 2013 ONCA 359, 116 O.R. (3d) 793, which
is the subject of the companion appeal to this case. In that case, the Ontario
Court of Appeal relied on a formulation of prudence review set out in Enbridge
Gas Distribution Inc. v. Ontario Energy Board (2006), 210 O.A.C. 4, at
para. 10:
-
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. [para. 16]
[31]
The ATCO Utilities argue that the statutes’
express use of the word “prudent” to qualify the costs and expenses that
electric and gas utilities are entitled to recover necessarily mandates the use
of that prudence test. I will refer to it as the “no-hindsight” test.
[32]
The language of the relevant provisions of the EUA
and GUA differs from the Ontario Energy Board Act, 1998, S.O.
1998, c. 15, Sch. B, in the companion OEB appeal. While the EUA and
the GUA contain specific references to “prudence”, the Ontario Energy
Board Act, 1998 does not. Further, regulations passed under the Ontario
Energy Board Act, 1998 expressly permit the Ontario Energy Board to establish
a methodology to determine whether revenue requirements are just and
reasonable. The EUA and GUA do not include a direct grant of
methodological discretion. However, like the statutory scheme in OEB,
neither the EUA nor the GUA impose a specific methodology and, as will be
explained, their references to “prudence” do not impose upon the Commission the
specific methodology advanced by the ATCO Utilities.
(1)
Prudence Under the EUA
[33]
The question before this Court is whether the
Commission’s interpretation and exercise of its rate-setting authority was
reasonable. The ATCO Utilities argue that the statutory framework supports its
assertion that it was entitled to a no-hindsight prudence review. Under the
reasonableness standard of review, the Commission’s interpretation of its home
statute is entitled to deference. In this case, the Commission did not
expressly address the question of whether the statutory regime mandated a
no-hindsight approach. Rather, its decision to proceed without using a
no-hindsight prudence test implies that it understood the relevant statutes not
to mandate the ATCO Utilities’ desired methodology. It is thus necessary to
examine the terms of the relevant statutes to determine whether the
Commission’s approach was reasonable. In doing so, this Court may make use of
the traditional tools of statutory interpretation with the goal of determining
whether the Commission’s approach was reasonable: see McLean v. British
Columbia (Securities Commission), 2013 SCC 67, [2013] 3 S.C.R. 895, at paras.
37-41.
[34]
The words of a statute are to be interpreted “in
their entire context and in their grammatical and ordinary sense harmoniously
with the scheme of the Act, the object of the Act, and the intention of
Parliament”: Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, at
para. 21, quoting E. A. Driedger, Construction of Statutes (2nd ed.
1983), at p. 87. Because, as will be discussed, the meaning of “prudence” is
the focus of much of the debate in this case, it is helpful to start by
examining the ordinary meaning of the word as a baseline for the subsequent
analysis. Pertinent dictionary definitions give a range of meanings for
“prudent”, including “having or exercising sound judgement in practical
affairs” (The Oxford English Dictionary (2nd ed. 1989), at p. 729),
“acting with or showing care and thought for the future” (Concise Oxford
English Dictionary (12th ed. 2011), at p. 1156), or “marked by
wisdom or judiciousness [or] shrewd in the management of practical affairs” (Merriam-Webster’s
Collegiate Dictionary (11th ed. 2003), at p. 1002). While these definitions
may vary in their nuance, the ordinary sense of the word is such that a prudent
cost is one which may be described as wise or sound.
[35]
However, these dictionary definitions are not so
consistent and exhaustive as to provide a complete answer to the question of
the meaning of “prudent” costs in the context of the Alberta utilities
regulation statutes. As such, a contextual reading of the statutory provisions
at issue provides further guidance. In the context of utilities regulation, I
do not find any difference between the ordinary meaning of a “prudent” cost and
a cost that could be said to be reasonable. It would not be imprudent to incur
a reasonable cost, nor would it be prudent to incur an unreasonable cost.
[36]
The EUA provides that an “owner of an
electric distribution system must prepare a distribution tariff for the purpose
of recovering the prudent costs of providing electric distribution
service by means of [its] electric distribution system”: s. 102(1). To receive
approval for the distribution tariff, the owner must apply to the Commission:
s. 102(2). When considering a tariff application, the Commission must ensure, inter
alia, that the tariff is “just and reasonable” (s. 121(2)(a)), a requirement
for which the burden of proof “is on the person seeking approval of the tariff”
(s. 121(4)).
[37]
Section 122(1) of the EUA provides that
the Commission “must have regard for the principle that a tariff approved by it
must provide the owner of an electric utility with a reasonable opportunity to
recover” a series of eight types of costs and expenses:
(a) the costs and expenses associated with capital related to
the owner’s investment in the electric utility, . . .
. . .
if
the costs and expenses are prudent . . .
(b) other prudent costs and expenses associated with
isolated generating units, transmission, exchange or distribution of
electricity . . . if, in the Commission’s opinion, they are applicable to the
electric utility,
(c) amounts that the owner is required to pay under this Act or
the regulations,
(d) the costs and expenses applicable to the electric utility
that arise out of obligations incurred before the coming into force of this
section and that were approved by the Public Utilities Board, the Alberta
Energy and Utilities Board or other utilities’ regulatory authorities if, in
the Commission’s opinion, the costs and expenses continue to be reasonable
and prudently incurred,
(e) its prudent costs and expenses of complying with the
Commission rules respecting load settlement,
(f) its prudent costs and expenses respecting the
management of legal liability,
(g) the costs and expenses associated with financial
arrangements to manage financial risk associated with the pool price if the
arrangements are, in the Commission’s opinion, prudently made, and
(h) any other prudent costs and expenses that the
Commission considers appropriate, including a fair allocation of the owner’s
costs and expenses that relate to any or all of the owner’s electric utilities.
[38]
Section 122 refers to prudence in two different
ways. Most frequently, the adjective “prudent” qualifies the expression “costs
and expenses”, which indicates that a utility enjoys a reasonable opportunity
to recover costs and expenses that are prudent. Absent a definition of the word
“prudent” or a clear inference that it refers to a no-hindsight rule as
described in Enbridge, this prudence requirement is to be understood in
the sense of the ordinary meaning of the word: for the listed costs and
expenses to warrant a reasonable opportunity of recovery, they must be wise or
sound; in other words, they must be reasonable.
[39]
By contrast, certain provisions use the adverb
“prudently” to qualify the utility’s decision to incur costs: s. 122(1)(d)
speaks of costs and expenses that are “reasonable and prudently incurred” and
s. 122(1)(g) refers to costs and expenses associated with financial
arrangements that were “prudently made”. Though this case does not call upon
this Court to evaluate the types of expenses covered by s. 122(1)(d) or (g),
statutory language referring to “prudently incurred” costs appears to speak
more directly to a utility’s decision to incur costs at the time the decision
was made. Such language may more directly implicate the no-hindsight approach
urged by the ATCO Utilities in this case than language that merely speaks of
“prudent costs”. This issue is further complicated for costs arising under s.
122(1)(d), where costs must both “continue to be reasonable and
prudently incurred”. The proper interpretation of these provisions is a
question best left for a case in which the issue arises.
[40]
In their submissions, the ATCO Utilities do not
parse the different contexts in which the word “prudent” is used in s. 122.
They argue more generally that the references to “prudence” imply that a no-hindsight
test is required, and that a utility’s costs must be presumed to be prudent.
[41]
However, the different uses of “prudence” in s.
122 are instructive. If the statute requires the Commission to approve
“prudently incurred” expenses, it may be unreasonable for the Commission to
fail to apply a no-hindsight methodology in reviewing such expenses. However,
the costs at issue in this case do not fall within the categories of costs for
which the statute grants recovery of “prudently incurred” costs. The use of the
adjective “prudent” to qualify “costs and expenses” elsewhere in s. 122 does
not itself imply a specific methodology. Nothing in the ordinary meaning of the
word “prudent” or the use of this word in the statute as a stand-alone
condition says anything about the time at which prudence must be evaluated.
[42]
Further, s. 121(4) of the EUA provides
that the burden of establishing that the proposed tariffs are just and
reasonable falls on the public utility. The requirement that tariffs be just
and reasonable is a foundational requirement of the tariff-setting provisions
of the EUA. Tariffs will not be just and reasonable if they do not
comply with the statutory requirement of s. 122 that the costs and expenses be
prudent. Thus, contrary to the ATCO Utilities’ proposed methodology, the
utilities’ burden to establish that tariffs are just and reasonable necessarily
imposes on the utilities the burden of establishing that costs are prudent.
[43]
In sum, neither the ordinary meaning of
“prudent” nor the statutory language indicate that the Commission is bound by
the EUA to apply a no-hindsight approach to the costs at issue, nor is a
presumption of prudence statutorily imposed in these circumstances.
(2)
Prudence Under the GUA
[44]
The GUA requires, inter alia, that
on application by the owner of a gas utility, the Commission “fix just and
reasonable” rates that “shall be imposed, observed and followed afterwards by
the owner of the gas utility”: s. 36(a). Section 44(1) provides that changes in
rates must be approved by the Commission, and the “burden of proof to show that
the increases, changes or alterations are just and reasonable is on the owner
of the gas utility seeking to make them”: s. 44(3). Further, s. 4(3) of
the RRR Regulation provides that
[a] gas distributor is entitled to
recover in its tariffs the prudent costs as determined by the Commission that
are incurred by the gas distributor . . . .
[45]
While the RRR Regulation makes a specific
reference to the recovery of “prudent” costs, I do not read this prudence
requirement as implying a presumption of prudence and application of a
no-hindsight rule. Regarding the “no hindsight” element, the statutory
provisions do not use “prudent” to describe the decision to incur the costs,
but rather to describe the costs themselves. Although s. 4(3) of the RRR
Regulation uses the term “incurred”, it is used to indicate that the
provision applies to costs incurred by the utility. No temporal inference can
be drawn from the use of “incurred” in this context; it is not used in a manner
that calls for examination of the prudence of the decision to incur certain
costs. The inquiry under s. 4(3) of the RRR Regulation rather asks
whether the costs themselves can be said to be “prudent”. The GUA does
not include a requirement that a no-hindsight rule must apply in assessing
whether costs are prudent, nor does the text of the GUA or the RRR
Regulation imply such a rule. Regarding a presumption of prudence, s. 44(3)
of the GUA stipulates that the utility has the burden to establish that
the rates are just and reasonable. Like the EUA, this in turn places the
burden of establishing the prudence of costs on the utility.
(3)
Conclusion With Respect to Statutory
Requirements of the EUA and GUA
[46]
Though the statutes do contain language allowing
for the recovery of “prudent” costs, the EUA and the GUA do not
explicitly impose an obligation on the Commission to conduct its analysis using
a particular methodology any time the word “prudent” is used. Further,
reserving any opinion on whether the term “prudently incurred” might require a
particular no-hindsight methodology, in this particular case the bare use of
the word “prudent” does not, on its own, mandate a particular methodology.
[47]
It is thus apparent that the relevant statutes
may reasonably be interpreted not to impose the ATCO Utilities’ asserted prudence
methodology on the Commission. The existence of a reasonable interpretation
that supports the Commission’s implied understanding of its discretion is
enough for the Commission’s decision to pass muster under reasonableness
review: McLean, at paras. 40-41. Thus, the Commission is free to apply
its expertise to determine whether costs are prudent (in the ordinary sense of
whether they are reasonable), and it has 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.
C.
Characterization of the Costs at Issue: Forecast
or Committed
[48]
As explained in OEB, understanding
whether the costs are committed or forecast may be helpful in reviewing the
reasonableness of a regulator’s choice of methodology: para. 83. Committed
costs are those costs that a utility has already spent or that were committed
as a result of a binding agreement or other legal obligation that leaves the
utility with no discretion as to whether to make the payment in the future:
para. 82. If the costs are forecast, there is no reason to apply a no-hindsight
prudence test because the utility retains discretion whether to incur the
costs: para. 83. By contrast, the no-hindsight prudence test may be appropriate
when the regulator reviews utility costs that are committed: paras. 102-5.
[49]
Determining whether particular costs are
committed or forecast turns on factual evidence relevant to those costs as well
as on legal obligations that may govern them. Factual evidence may take the
form of details regarding the structure of the utility’s business, relevant
conduct on the part of the utility, and the factual context in which the costs
arise. Legal issues may relate to any contractual, fiduciary or regulatory
obligations that grant or bar discretion on the part of the utility in
incurring the costs at issue. Where the regulator has made an assessment of
whether the costs are committed or forecast, that assessment is owed deference
by this Court.
[50]
On the basis of the evidence and the arguments before it, the
Commission found that the “COLA amount ha[d] not yet been awarded for 2012
because consideration of the COLA adjustment occurs towards the end of the
calendar year”: Decision 2011-391, at para. 93. The Commission
concluded that there was enough time from the date Decision 2011-391 was
published on September 27, 2011 to the end of the calendar year for the ATCO
Utilities and their parent Canadian Utilities “to prospectively decide whether
to separately fund any difference Canadian Utilities may choose to pay beyond
the COLA level approved for regulatory purposes for 2012 onwards”: ibid.
This finding supports a characterization of the disallowed COLA costs as
forecast because their disallowance left it open to Canadian Utilities to
reduce the COLA that would apply to the 2012 benefit payments to 50 percent of
CPI or to incur the COLA of 100 percent of CPI regardless, knowing that the
differential would ultimately be borne by the utilities: OEB, at para.
82.
[51]
However, the Commission did not disallow the use of a COLA of 100
percent of CPI (up to a maximum of 3 percent) with regard to the special
payments intended to address the unfunded liability and fixed by the 2009 Actuarial
Report for the year 2012. The Commission did so by reasoning that any consumer
overpayment that resulted in 2012 would be compensated through reduced special
payments once a new report was prepared for 2013 onward.
[52]
In their factum in this Court, the ATCO
Utilities submitted that the COLA costs were committed in the same way as the
costs fixed by binding collective agreements were in the companion OEB appeal.
In oral argument, counsel for the ATCO Utilities explained that the pension
actuary prepares an actuarial report at intervals of a maximum of three years
and files it with the Superintendent of Pensions: see ss. 13 and 14 of the Employment
Pension Plans Act (2000)
and ss. 9 and 10 of the Employment Pension Plans Regulation (2000).
[53]
In this case, the 2009 Actuarial Report applied
for the years 2010, 2011 and 2012. The pension actuary determined the
employer’s required contribution to fund projected benefits owed to
beneficiaries and to address any unfunded liability in the DB plan. For each of
the three years covered by the report, the actuary assumed a post retirement
pension increase of 2.25 percent per year to be included in required
contributions.
It was argued by the ATCO Utilities that the employer is required by law to
make such contributions: s. 48(3) of the Employment Pension Plans Regulation
(2000).
Accordingly, the ATCO Utilities submitted that once the actuarial report
covering 2010, 2011 and 2012 had been filed, the amounts identified in that
valuation, including a post retirement pension increase of 2.25 percent, should
be understood as committed.
[54]
To address this argument, a distinction must be
drawn between the COLA that is used to determine the post retirement pension
increases applied to employer contributions paid into the DB plan, and the COLA
applied to benefit payments paid out of the plan.While the ATCO Utilities were legally
bound to make contributions including a post retirement pension increase of
2.25 percent into the plan for 2012, the actual COLA paid out to
beneficiaries was set by Canadian Utilities on an annual basis. The ATCO
Utilities’ information responses to the Commission in preparation for their
2011 pension common matters application show that the actual COLA set by Canadian
Utilities for 2010 was 0 percent and for 2011 was 1.7 percent.
[55]
The ATCO Utilities’ argument that the costs are
committed rests on the notion that if the Commission reduces the recoverable
COLA to 50 percent of CPI (up to a maximum of 3 percent), they risk incurring a
shortfall because the COLA recovered through rates will be less than the post
retirement pension increases of 2.25 percent that they were legally obliged to
contribute.
[56]
However, while both the employer contributions
into the DB plan and the benefit payments made to beneficiaries are subject to
cost of living adjustments, the portion of Decision 2011-391 at issue in
this appeal was concerned specifically with the reasonableness of the COLA to
be set by Canadian Utilities for the 2012 benefit payments. As such, the
Commission’s disallowance was with respect to the COLA benefits to be paid out
to beneficiaries in 2012 — not to the employer contributions into the DB plan.
[57]
Contrary to the submissions of the ATCO
Utilities, the facts of this case are different from those in OEB. In OEB,
the utility was bound to pay certain costs by virtue of collective agreements
with separate counterparties, the employee unions. In this case, the Commission
found that the COLA applied to benefit payments from the DB plan was set by the
ATCO Utilities’ parent, Canadian Utilities, and that Canadian Utilities
retained discretion over the setting of the COLA for the test period. DB plan
members would ultimately receive benefits reflecting a COLA of 100 percent in
2012 only if Canadian Utilities decided to set the COLA at that level.
[58]
Canadian Utilities may have exercised that
discretion in such a way as to avoid saddling its regulated subsidiary with
costs it knew would not be recovered. Accordingly, while the ATCO Utilities
were required to make contributions reflecting a post retirement pension
increase of 2.25 percent into the DB plan pursuant to the 2009 Actuarial
Report, the COLA applied to benefit payments for 2012 was not committed when
the Commission issued its Decision 2011-391. This is so because at the time
Decision 2011-391 was published, Canadian Utilities had yet to set
COLA for 2012.
[59]
It was not unreasonable for the Commission to
decide, without applying a no-hindsight analysis, that 50 percent of CPI (up to
a maximum of 3 percent) “represent[ed] a reasonable level for setting the COLA
amount for the purposes of determining the pension cost amounts for regulatory
purposes” in 2012: Decision 2011-391, at para. 92.
D.
Considering the Impact on Rates in Evaluating
Costs
[60]
The ATCO Utilities argue that in considering the
prudence of the COLA costs the Commission was preoccupied with the aim of
reducing rates charged to customers.
[61]
As discussed above, a key principle in Canadian regulatory law is
that a regulated utility must have the opportunity to recover its operating and
capital costs through rates: OEB, at para. 16. This requirement is
reflected in the EUA and
GUA, as these statutes refer to a reasonable opportunity to recover
costs and expenses so long as they are prudent. A regulator must determine
whether a utility’s costs warrant recovery on the basis of their reasonableness
— or, under the EUA and GUA, their “prudence”. Where costs are
determined to be prudent, the regulator must allow the utility the opportunity
to recover them through rates. The impact of increased rates on consumers
cannot be used as a basis to disallow recovery of such costs. This is not to say
that the Commission is not required to consider consumer interests. These
interests are accounted for in rate regulation by limiting a utility’s recovery
to what it reasonably or prudently costs to efficiently provide the utility
service. In other words, the regulatory body ensures that consumers only pay
for what is reasonably necessary: OEB, at para. 20.
[62]
In this case, the Commission did emphasize the
effect that reducing the COLA would have on the ATCO Utilities’ unfunded
liability. It is also true that a lower unfunded liability based on an
actuarial report using a 50 percent COLA instead of 100 percent would mean a
lower revenue requirement, and thus lower rates passed on to consumers.
However, I do not agree with the ATCO Utilities’ submission that the
Commission, in considering the effect of COLA on the utilities’ unfunded
pension liability, was basing its disallowance on concerns about rate hikes for
consumers. Regulators may not justify a disallowance of prudent costs solely
because they would lead to higher rates for consumers. But that does not mean a
regulator cannot give any consideration to the magnitude of a particular cost
in considering whether the amount of that cost is prudent.
[63]
Indeed, it seems axiomatic that any time a
regulator disallows a cost, that decision will be based on a conclusion that
the cost is greater than ought to be permitted, which leads to the inference
that consumers would be paying too much if the cost were incorporated into
rates. But that is not the same as disallowing a cost solely because it
would increase rates for consumers. In this case, the Commission found it
unreasonable for the ATCO Utilities to receive payments to cover a COLA of 100
percent while they carried a large unfunded liability on their books, in part
because of evidence from comparator companies that COLA figures of less than
100 percent were common, and because of the Commission’s finding that a COLA of
100 percent was not necessary to ensure that the ATCO Utilities could attract
and retain employees. While this conclusion carries with it the consequence
that rates will be lower as a result, the Commission reasoned from the prudence
of the costs themselves, not from a desire to keep rates down, to arrive at its
conclusion to disallow costs. I find nothing unreasonable in the Commission’s
reasoning in this regard.
VI.
Conclusion
[64]
The Commission was not statutorily bound to apply a particular
methodology to the costs at issue in this case. The use of the word “prudent”
in the EUA and GUA cannot by itself be read to impose upon the
Commission the specific no-hindsight methodology urged by the ATCO Utilities.
[65]
While 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, the Commission did
not act unreasonably in this case. The disallowed costs were forecast costs.
Accordingly, it was reasonable in this case for the Commission to evaluate the
ATCO Utilities’ proposed revenue requirement in light of all relevant
circumstances. Further, because the Commission did not use
impermissible methodology, it was not unreasonable for the Commission to direct
the ATCO Utilities to reduce their pension costs incorporated into revenue
requirements by restricting annual COLA to 50 percent of CPI (up to a maximum
of 3 percent) for current service costs from 2012 onward and for special
payments addressing the unfunded liability from 2013 onward.
[66]
For these reasons, I would dismiss the appeal.
Appeal
dismissed.
Solicitors for the
appellants: Bennett Jones, Calgary.
Solicitor for the
respondent the Alberta Utilities
Commission: Alberta Utilities Commission, Calgary.
Solicitors for the
respondent the Office of the
Utilities Consumer Advocate of Alberta: Reynolds, Mirth, Richards &
Farmer, Edmonton; Michael Sobkin, Ottawa.