Rates –Recovery of Costs – Late Payment Penalty Class Action Defence Costs – Prudent/Reasonable Costs
Following six years of litigation, Direct Energy Regulated Services (“DERS”) reached a settlement with certain regulated customers who had brought a class action lawsuit seeking damages related to DERS’ late payment penalty (“LPP”) charge (the “LPP Class Action”).
DERS filed an application with the AUC on August 13, 2015 seeking AUC approval of a rate rider to refund its customers $5,778,000, which represented the customer refund amount under the court approved LPP Class Action settlement agreement.
The Consumers’ Coalition of Alberta (the “CAA”) made submission to the AUC objecting to DERS’ application. The CAA argued that DERS’ August 13 application and DERS’ forthcoming application – seeking to recover its costs related to defending the LPP Class Action – should be submitted as a single “net application.” The AUC agreed and directed DERS to submit a single application that included both the customer refund rate rider request and the request to recover costs related to defending the LPP Class Action.
DERS filed an updated application seeking AUC approval to collect $6,093,175 (the “Net Costs”) from its customers as a one-time rate rider. That Net Costs amount represented $13,569,257 in total costs by DERS’ related to the LPP Class Action, which included settlement costs, legal defence costs, and other associated costs (the “LPP Class Action Costs”), net the $5,778,000 refund to customers. In addition, DERS identified $1,698,082 in LPP Class Action Costs that had previously been recovered in previous general rate applications, and that amount was not included in the Net Costs. DERS provided a breakdown of the Net Costs, reproduced in the table below.
Recovery of LPP Class Action Costs
The AUC first considered whether the LPP Class Action Costs are costs eligible for recovery by ratepayers. The AUC considered a number of decisions from the Ontario Energy Board (the “OEB”), where the OEB considered the recoverability of costs incurred by utilities defending similar LPP class actions.
The AUC considered OEB Decision EB2010-295, where the OEB held that a utility’s costs associated with defending a similar LPP class action to be prudent and therefore recoverable by utilities from ratepayers. The OEB supported its decision on the basis that:
• Imposition of the LPP was an action undertaken by the utilities to protect the interest of the large majority of ratepayers that pay on time;
• All funds generated by the LPP were for the benefit of ratepayers as a whole and did not go to the utility as a special fund or source of profit; and
• The LPP [in Ontario] was specifically mandated by the relevant regulatory authorities.
In Alberta, the LPP was not mandated by the regulator. Rather, DERS had applied under previous rate applications to adopt the LPP charge. The AUC had approved DERS’ LPP as recently as July 2015.
Notwithstanding certain jurisdictional differences in regulatory rules, the AUC noted that the OEB’s comments on LPP charges being for the benefit of the majority of ratepayers that pay on time were equally applicable in Alberta as in Ontario.
The AUC went on to consider the history of LPP charges before the Alberta Courts and the AUC. Similar to Ontario, the AUC noted a number of Alberta decisions where costs associated with defending LPP class action lawsuits were held to be recoverable. The AUC noted that the LPP served an important regulatory purpose by encouraging the timely payment of bills.
The AUC rejected the CCA’s submissions that in approving the LPP Class Action settlement agreement, the court intended DERS’ shareholders, rather than ratepayers, to bear the burden of the settlement costs. In rejecting the CCA argument, the AUC explained that the settlement costs were in connection with DERS’ provision of regulated services. The settlement costs in this situation fell properly within the AUC’s ratemaking jurisdiction.
Therefore, DERS was permitted to recover the Net Costs from ratepayers, subject to the AUC’s determination of the reasonableness and/or prudence of the costs claimed.
Prudence or Reasonableness of Costs
The AUC summarized the recent Supreme Court of Canada (“SCC”) decisions in ATCO Gas and Pipelines Ltd. v Alberta (Utilities Commission), 2015 SCC 45 (“ATCO Gas”) and Ontario (Energy Board) v Ontario Power Generation, 2015 SCC 44 (“OEB v OPG”), where the SCC provided guidance regarding the role of a tribunal when considering the reasonableness or prudence of a utility’s costs.
The AUC summarized the following important SCC holdings from ATCO Gas and OEB v OPG:
• In the context of utilities regulation, there is no difference between the ordinary meanings of “prudent” and “reasonable” (ATCO Gas at para 35);
• Unless expressly provided for in the relevant legislation, there is no presumption of prudence or reasonableness with respect to costs incurred by a utility (i.e. burden of proof is on the utility to establish costs incurred were prudent. OEB v OPG at para 79); and
• In the absence of express statutory provisions, a tribunal is free to exercise its expertise and has discretion to consider a variety of analytical tools and methodologies in determining whether costs are prudent (ATCO Gas at para 48);
• The SCC left open the question of whether the term “prudently incurred” would impose upon a tribunal a particular “no-hindsight” methodology (i.e. prudence is judged on the basis of the information that was known or should have been known to that utility at the time costs were committed).
Settlement Costs
With this background, the AUC first considered the prudence of the settlement costs portion of the LPP Class Action Costs (see Table 1 above).
For settlement costs, the AUC adopted a “no-hindsight prudence review” test because those costs had been incurred at the time the settlement agreement was entered into. The test assesses the prudence of a utility’s costs on the basis of the information that was known or should have been known to that utility at the time settlement costs were committed (e.g. at the time DERS entered into the settlement agreement). The AUC also noted that under such a test, the burden remains with the utility to establish the prudence of costs incurred.
The AUC found that between the information provided by DERS and the information available in court records, there was sufficient information for the AUC to determine the reasonableness of the settlement costs.
The AUC held that entering into the settlement was a reasonable course of action and likely saved ratepayers the costs of continued litigation. The AUC concluded that the settlement costs, as submitted by DERS, were reasonable and therefore recoverable.
Defence Costs
The AUC went on to compile a list of relevant factors to assess the prudence of the defence costs portion of the LPP Class Action Costs.
In addition to the ATCO Gas and OEB v OPG decisions, the AUC referenced AUC Rule 022, ATCO Gas and Pipelines Ltd. v Alberta (Utilities Commission), 2014 ABCA 397, and Helm v Toronto Hydro Electric System Limited, 2012 ONSC 2602, in compiling its list of relevant factors. In determining the prudence of the defence costs, the AUC considered whether:
(a) the amount of the settlement is substantial, particularly having regard to the difficulties associated with recovery of the claim;
(b) the liability was contested and the outcome was difficult to predict;
(c) the work was done at all;
(d) the work done was excessive;
(e) the work was duplicated;
(f) too many people were put to work;
(g) the people chosen to do the work were too expensive;
(h) the charges of those working were too high; and
(i) the work was conducted in an efficient, imaginative and cost-effective manner.
The AUC noted that no assessment of DERS’ defence costs was undertaken by the courts or by external audit. Therefore the AUC had only the information provided by DERS to assess the reasonableness of those costs.
With respect to the amount of the settlement being substantial, the AUC noted that the LPP Class Action was ongoing for a long period, and involved many complex legal issues. This weighed in favour of approving DERS’ defence costs.
The AUC also held that it was satisfied that the work was done, but noted a number of areas where work might have been duplicated or certain tasks were completed by overqualified people. The AUC examined legal bills in detail, and concluded that a 25% reduction to the legal fees claimed was warranted. Of the $4,408,067 in defence costs incurred by DERS, the AUC approved $3,306,050 as recoverable from ratepayers.
Method of Recovery
DERS proposed the Net Costs be collected from ratepayers by way of a one-time rate rider. The AUC disagreed with DERS that the proposed rate rider, which resulted in a collection of $8.38 per site, would not constitute a rate shock to its customers. The AUC noted that the proposed rider would result in bills approximately twice as large for the average DERS customer.
To mitigate this potential for shock to some customers, the AUC approved a rate rider over a 6-month collection period.
Additional Comments of Bill Lyttle (AUC Commissioner)
AUC Commission Member Bill Lyttle made additional comments on the difficulties faced by the AUC reconciling the interests of all ratepayers and the class of ratepayers that were plaintiffs as part of the class in the LPP Class Action.
Commissioner Lyttle stated:
I am sensitive to the plight of DERS’ customers especially in these challenging economic times. I find it particularly difficult to explain to ratepayer that parties from both sides had extensive legal and expert costs, and were racking up hourly charges for this account over many years. The plaintiff and defence legal teams were paid significant hourly rates as detailed in the decision. The size of these legal teams were shamefully large and extensive. A change in legislation may be required so that ratepayers are left with the benefit of the settlement but the entirety of the resultant costs should be addressed in some other manner.
