The Supreme Court Clarifies The Role And Nature Of The 'Prudence' Test In Canadian Utility Regulation

Background

The Supreme Court of Canada recently released its highly anticipated decisions on utility regulation in Ontario Energy Board v. Ontario Power Generation Inc., 2015 SCC 44 (noted as an Appeal to Watch in 2015 here) and ATCO Gas and Pipelines Ltd. v. Alberta (Utilities Commission), 2015 SCC 45 . These regulatory decisions analyzed a utility's ability to recover operating and capital costs from consumers through rate-setting, and the methodology to be used in approving rate increases.

The Ontario Power Generation Decision

In Ontario (Energy Board) v. Ontario Power Generation Inc., the Supreme Court reviewed the Ontario Energy Board ("OEB" or the "Board")'s decision to disallow $145 million in labour compensation costs applied for by Ontario Power Generation ("OPG") in its 2011-2012 rates application. The OEB had disallowed these costs, which were related to OPG's nuclear operations, on the basis that OPG's labour costs were not in line with comparable entities in the nuclear industry. The principal question on appeal was whether the Board should have used the "no-hindsight" prudence test to determine whether the labour compensation costs were reasonable.

Applying a standard of review of reasonableness,1 the Court overturned the decision of the Ontario Court of Appeal and reinstated the decision of the OEB and the Divisional Court, holding that the OEB's decision to disallow the $145 in labour compensation costs was reasonable. The Court found that the costs in question were "best understood as at least partly committed"2 (as opposed to entirely "forecast" costs) because they resulted from collective agreements entered into between OPG and two of its unions but were also subject to management discretion because OPG had some flexibility to manage total staffing levels by way of, among other things, attrition of the workforce.

The Court focused on the statutory language pursuant to which the OEB is tasked to review payment amounts applied for by OPG, namely the language that requires the OEB to set "just and reasonable" payments and the absence of any other language prescribing the manner or methods to be used by the OEB under the relevant statutory provisions and regulations.3 The Court held that:

"[W]here a statute requires only that the regulator set "just and reasonable" payments, as the Ontario Energy Board Act, 1998 does in Ontario, the regulator may make use of a variety of analytical tools in assessing the justness and reasonableness of a utility's proposed payment amounts."4

The Court found that this was particularly true when, pursuant to section 6(1) of O. Reg. 53/05, the OEB is given express discretion over the "form, methodology, assumptions and calculations used in making an order that determines payment amounts for the purpose of section 78.1 [of the Ontario Energy Board Act]."5

The Court's analysis included an examination of the "prudence test" or "prudent investment test" as it has evolved in utilities regulation in the United States and Canada. The Court...