Appeal – Dismissed – Standard of Review – Prudency of Costs – Reasonableness
In a unanimous decision, the Supreme Court of Canada (“SCC”) dismissed the appeal of ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd. (collectively, “ATCO”) in respect of AUC Decision 2011-391. AUC Decision 2011-391 denied ATCO’s request to recover 100 percent of the annual consumer price index (“CPI”) cost of living adjustment (“COLA”) amounts as part of its pension costs for 2012 (the “AUC Decision”).
The AUC Decision ruled that only 50 percent of the CPI, up to a maximum COLA of 3 percent was reasonable. ATCO appealed the AUC Decision to the Alberta Court of Appeal, which was dismissed in Atco Gas and Pipelines Ltd. v Alberta (Utilities Commission), 2013 ABCA 310. ATCO further appealed to the SCC, which appeal the SCC dismissed.
Issues
ATCO’s pension plan was in a surplus position from 1996 to 2009 and no employer contributions were required during these times. However, the SCC noted, in the wake of the 2008 financial crisis, that the market value of the pension fund dropped to a shortfall position. ATCO was required to resume employer contributions in 2010.
As a result of an actuarial report, two types of employer contributions were required:
(a) Current service costs, for payments to address projected benefits to beneficiaries in 2010, 2011 and 2012; and
(b) Annual special payments to address an unfunded liability of $157.1 million across ATCO’s corporate structure (including non-regulated entities).
The cost of the annual special payments attributable to ATCO was approximately $13.9 million per year. The actuarial report indexed the current service costs to account for inflation through a COLA based on the CPI, which it set at 2.25 percent for each of the three years in question.
In the AUC Decision, the AUC rejected the inclusion of the COLA amounts in light of benchmark evidence showing a wider range of COLA percentages used by other pension plans within ATCO’s comparator group, mostly between 50 and 75 percent of CPI. The AUC set the allowable costs at 50 percent of CPI to a maximum of 3 percent for the COLA amounts, and reduced ATCO’s revenue requirement accordingly.
The SCC noted three issues raised by ATCO on appeal:
(a) What is the standard of review;
(b) Does the regulatory framework prescribe a certain methodology in assessing whether costs are prudent; and
(c) Was it reasonable for the Commission to refuse to incorporate 100 percent of the CPI to a maximum of 3 percent into ATCO’s COLA revenue requirements?
Standard of Review
ATCO argued that the jurisprudence favoured a standard of correctness, as ATCO framed the issues as true questions of jurisdiction (i.e. where the regulator was called on to determine whether it had the statutory authority to decide a particular question).
The SCC rejected ATCO’s approach, noting that the AUC was interpreting its home statute, and as such, a standard of reasonableness is presumed. The SCC also held that the decision in question lied at the heart of the AUC’s expertise of ratemaking, and was deserving of a high degree of deference. True questions of jurisdiction are rare and exceptional; the SCC noting that such a category of question may not exist at all.
Methodology for Determining Prudence
ATCO argued that the guarantee of a reasonable opportunity to recover their costs requires the AUC to examine whether the decisions to incur costs by the utility were prudent, and that a presumption of prudence applies in favour of the utility. ATCO argued that the AUC was required to apply the following prudence test:
(a) Decisions made by the utility’s management should generally be presumed to be prudent unless challenged on reasonable grounds;
(b) 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;
(c) 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; and
(d) 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,
(the “No-Hindsight Test”).
ATCO argued that the use of the word “prudent” in the Gas Utilities Act and the Electric Utilities Act mandated the use of the above No-Hindsight Test when assessing the prudence of costs.
In applying the standard of review of reasonableness, the SCC assessed whether the AUC’s approach to interpreting the Gas Utilities Act and the Electric Utilities Act was reasonable. The SCC held that the meaning of “prudent” in the statue was no different than “reasonable”, holding that it would not be imprudent to incur a reasonable cost, nor would it be prudent to incur an unreasonable cost. The SCC arrived at its conclusion noting the interplay between section 102 and sections 121 and 122 of the Electric Utilities Act.
Under section 102 of the Electric Utilities Act, a utility must prepare a distribution tariff for the purpose of recovering its prudent costs and apply to the AUC for approval of the same. Under sections 121 and 122 of the Electric Utilities Act, the AUC must consider the application to ensure that the proposed tariff is just and reasonable, and that the onus is on the applicant to establish the justness and reasonableness of the tariff.
Absent any clear inference that “prudent” is intended to refer to the No-Hindsight Test, the SCC held that prudence in the Electric Utilities Act should be interpreted in the ordinary meaning of the word. However, the SCC limited the application of its finding, noting that interpretations of provisions referring specifically to costs “prudently incurred”, or speaking more directly to a utility’s decision to incur costs at the time the decision was made, should be left for a case in which the issue arises.
The SCC made similar findings with respect to the Gas Utilities Act, holding that the statutory provisions do not use “prudent” to describe the decision to incur the costs, but rather they describe the costs themselves, and that no temporal reference should apply. The SCC further noted a similar statutory arrangement in the Gas Utilities Act in respect of the onus of establishing the justness and reasonableness of a tariff, holding that section 44(3) requires the utility to establish that the tariff is just and reasonable. The SCC also found that there were no clear inferences in the Gas Utilities Act to require the AUC to apply the No-Hindsight Test.
The SCC held that the statutory language indicated that the AUC was not bound to apply the No-Hindsight test, nor did a presumption of prudence apply with respect to the Gas Utilities Act or the Electric Utilities Act. Accordingly, the Court held that the AUC’s interpretation of the Electric Utilities Act and the Gas Utilities Act was reasonable.
Reasonableness of the AUC’s Decision
ATCO submitted that its COLA costs were committed and not forecast costs, since ATCO was bound by the Employment Pension Plans Regulation to make the payments. ATCO further submitted that the AUC was preoccupied in its decision with the aim of reducing rates charged to customers.
The SCC noted that although it would be axiomatic to say that if a regulator disallows a cost, that decision will be premised on the conclusion that the cost is greater than it ought to be, and leads to an inference that consumers would therefore be paying too much. However, the SCC held that this was not the same as disallowing a cost for the sole reason of consumer rates. The SCC upheld the reasonableness of the AUC Decision to disallow the COLA of 100 percent, noting that the AUC based its decision on evidence of comparator companies, and the finding that the COLA amount was not necessary for ATCO to retain and attract employees. The SCC determined that while lower rates were the result of the AUC Decision, it was not the motivating reason for the decision.
The Court accordingly dismissed the appeal on this issue.
Conclusion
In conclusion, the SCC held that while there may be situations where a failure to apply the No-Hindsight Test may result in an unjust outcome for a utility, the AUC did not act unreasonably in this case. The SCC held that the disallowed costs were forecast costs, and the AUC did not apply an impermissible methodology. As a result, the direction to reduce the annual COLA to 50 percent of CPI, to a maximum of 3 percent, was not unreasonable.
The SCC dismissed the appeal.
