Supreme Court Determines Regulator Discretion Is Wide And The Prudency Test Is Ongoing

The past week has seen three significant decisions relating to the manner in which the rates of public utilities are to be determined in Canada. Although one can argue about whether the decisions clarify and confirm existing law or create new law, no one can reasonably dispute that utilities face new challenges to establish rates that will allow them to recover all of their capital and operating costs as a result of these decisions.

On September 18, 2015, the Alberta Court of Appeal handed down its decision in FortisAlberta Inc. v Alberta (Utilities Commission), 2015 ABCA 295. Nearly all Alberta electric and gas utilities participated to argue strongly that they should be able to continue to recover capital costs of facilities committed to the service of customers and determined by the regulator to be in the public convenience and necessity even if those assets later ceased to be useful in providing public utility service due to an unanticipated event. The AUC held that utilities must remove from their rate base any assets that are no longer used and useful and further, that there is no ongoing right to be compensated for the unrecovered costs. The Alberta Court of Appeal accepted that decision was reasonable and dismissed the appeal from it.

Adopting similar logic, on September 25, 2015 the Supreme Court of Canada (SCC) upheld the Alberta Utilities Commission (AUC) and Ontario Energy Board (OEB) decisions in two cases involving the prudence of operating costs (ATCO Gas and Pipelines Ltd. v Alberta (Utilities Commission), 2015 SCC 45 and Ontario (Energy Board) v Ontario Power Generation Inc., 2015 SCC 44). In those decisions, the SCC held that the AUC and the OEB had not acted unreasonably in denying the utilities the ability to recover operating costs (COLA benefits in relation to company pension expenses which had yet to be finalized, in the Alberta case, and, wage costs under a collective agreement which were entirely foreseeable and, at the time of hearing, largely unavoidable but which the utility had failed to establish were prudently incurred, in the Ontario case). The utilities' argument that the costs should be presumed prudent until proven otherwise was expressly rejected by the regulator and that was held to be reasonable by the Courts.

The burden of all three of these...