Appeal – Dismissed – Risk of Stranded Assets – Procedure
ENMAX Power Corporation, ATCO Gas and Pipelines and ATCO Electric Ltd., AltaGas Utilities Inc., EPCOR Distribution & Transmission Inc., FortisAlberta Inc., and AltaLink Management Ltd., in its capacity as general partner of AltaLink, L.P. (collectively, the “Utilities”) appealed two decisions of the AUC to the Alberta Court of Appeal (the “ABCA”):
(a) Decision 2013-417, known as the Utilities Asset Disposition decision, wherein the AUC held that the risk of stranded assets should be borne by utility shareholders rather than be retained in rate base and paid for by ratepayers (the UAD Decision”); and
(b) Decision 2011-474, known as the Generic Cost of Capital decision, with respect to which the Utilities raised concerns regarding the procedural aspects of the decision (the “GCOC Decision”).
UAD Decision Appeal
With respect to the UAD Decision, the ABCA described three developments that were of relevance to Alberta utility regulation:
(a) Issues of stranded assets, as well as the nature of and various treatments of stranded assets;
(b) The scope and effect of the Supreme Court of Canada (“SCC”) Stores Block case (2006 SCC 4) (“Stores Block”) relating to the power of the AUC in dealing with asset dispositions; and
(c) The deregulation of the electricity sector in Alberta.
The ABCA described stranded assets as any assets that have lost their usefulness before the end of their expected economic life. Such assets are not yet fully depreciated, and are no longer capable of being used. The ABCA indicated that stranded assets fell into a broader category of “stranded costs”, where the expected revenues from ratepayers are insufficient to cover a utility’s operating costs and to provide a fair return on investment.
The stranded assets at issue before the ABCA were because of extraordinary and unanticipated events, such as flood, fire and early obsolescence.
In the Stores Block decision, the SCC held that all gains and all losses arising on an extraordinary disposition were solely on account of the utility, and not to ratepayers. The SCC found that the ‘regulatory compact’ did not translate into a property right for ratepayers to the underlying assets of the utility, meaning that none of the gains on any asset sale could be allocated to ratepayers.
The AUC was subsequently faced with a number of conflicting interpretations of how to apply Stores Block in the context of its own regulatory mandate. The AUC had initiated the UAD proceeding to consider the disposition of assets in the wake of the Stores Block decision.
In this decision, the ABCA also summarized the deregulation of the electricity market in Alberta. The ABCA noted that the treatment of plants built under the previous regulatory model was the subject of debate, which culminated in the Electric Utilities Amendment Act in 1998. This amendment introduced Power Purchase Arrangements (“PPA”) to overcome the concentration of market power and to create competition by having existing power producers sell the output of their regulated generating units under PPAs.
Standard of Review
In dealing with the standard of review, the ABCA determined that since the AUC was interpreting its own home statute, a presumption of deference to the decision-maker’s interpretation applied. The ABCA held that there was little argument that the AUC possessed expertise in the area of rate-setting and utility regulation. The ABCA canvassed possible exceptions to this presumption, noting that the presumption can be overturned:
(a) Through a contextual analysis; or
(b) If the question warrants a review on the correctness standard, either as a question of law of central importance to the legal system, or a true question of jurisdiction.
The ABCA determined that the appeals did not raise a question of jurisdiction and noted that this power was well within the expertise of the AUC, and indeed central to its mandate.
The ABCA held that it would review the decisions under appeal on a standard of reasonableness. This was due to the fact that the issue before the ABCA was not whether the interpretation being urged by the Utilities was reasonable, but whether the approach adopted by the AUC was unreasonable.
Central Issues and ABCA Rulings
The ABCA described the central issue in the UAD Decision as a consideration of who bears the loss on assets that are not fully depreciated if rendered unusable as a result of unanticipated events.
In following the SCC’s determinations in Stores Block, the AUC determined in the UAD Decision, that all stranded assets would be to the account of the utility and not the ratepayers.
The ABCA summarized the AUC’s findings as follows:
(a) Stores Block also applies to dispositions in the ordinary course of business. To hold otherwise would amount to a finding that customers have acquired a property interest in the assets, contrary to the findings in Stores Block;
(b) Assets can only remain in rate base if they are used or required to be used to provide service. If an asset is no longer used, it must be removed from rate base;
(c) The AUC’s depreciation practices using mass property accounts was consistent with Stores Block, as the depreciation methods remove depreciable assets that are no longer used or required to be used to provide utility service from rate base and customer rates; and
(d) Any assets that cease to be used or required to be used prior to the end of its economic life (i.e. not fully depreciated) must be removed from rate base as an extraordinary retirement for the account of the utility, and not ratepayers.
The Utilities argued that the AUC’s conclusions in the UAD Decision for gas utilities would prevent them from fully recovering their prudently incurred costs, and therefore must be restricted to assets disposed of outside the ordinary course of business.
The Utilities further submitted that the UAD Decision, as it applied to electric utilities, inappropriately relied on Stores Block, which applied to regulated gas utilities. The Utilities submitted that the electrical regulatory regime was fundamentally distinct from the gas regulatory regime, and that Stores Block and subsequent decisions therefore did not apply.
With respect to the UAD Decision as it applies to gas utilities, the Utilities argued that the regulatory compact, as reflected throughout the statutory regime, entitled them to a return on their prudent capital investment and a return of all prudent capital investment in all circumstances.
The Utilities submitted that the “used or useful” criterion for assets remaining in rate base applied only to the calculation of a reasonable return on investment. In contrast, the Utilities submitted that the return of prudent capital investment was an absolute requirement under section 36 of the Gas Utilities Act (the “GUA”). The Utilities further relied on section 4(3) of the Rules, Relationships and Responsibilities Regulation, in that a gas distributor is entitled to recover in its tariffs the prudent costs, as determined by the AUC, of the gas distributor in carrying out its obligations.
The ABCA held that it did not read the language of the GUA to require the guaranteed cost recovery as advocated for by the Utilities. The ABCA found that the distinction that the Utilities attempted to draw was not dictated by the plain language of section 36 of the GUA. The ABCA also relied upon a contextual reading of sections 36 and 37 of the GUA together as giving the AUC a mandate to fix just and reasonable rates for the utility service received. The ABCA held that there is no absolute obligation for ratepayers to continue to pay for a service that they are not actually receiving.
The ABCA determined that the statutory framework for utility regulation in Alberta does not dictate only a single possible solution to the problem of stranded assets, as argued by the Utilities.
The ABCA described the Utilities’ view of the ‘regulatory compact’ as overbroad, noting that the regulatory compact offers an opportunity to earn a reasonable return on prudent investment, and to recover its prudently incurred expenses. The ABCA further rejected the argument that that UAD Decision was confiscatory, finding that public utilities are protected against the arbitrary acts of commissions, but not from normal course business hazards or other economic forces. The AUC, in the ABCA’s holding, struck a symmetrical approach to extraordinary retirements, allowing the utility shareholder to exclusively benefit from, and bear the risks of, any gain or loss in keeping with the Stores Block decision.
The ABCA also found that it is the Utilities that estimate the future useful life of their assets in applying for their respective revenue requirements. The AUC in turn uses these estimates as a key factor in evaluating whether such costs are prudent in fixing just and reasonable rates, and such a statutory role was not, in the ABCA’s view, usurped by any guarantee of a return of all investments in all circumstances.
With respect to the Utilities’ submissions that Stores Block arose in the context of gas utility regulation, and that the AUC’s UAD Decision failed to account for the historic and legislative differences between electric utilities and gas utilities, the Utilities submitted that unlike the Gas Utilities Act, the Electric Utilities Act makes no mention of rate base assets being “used or required to be used” in order to provide service. The Utilities submitted that this was a clear and express statement that the legislature did not intend that assets must be “used or required to be used” in order to be included in an electric utility’s tariff. Therefore, the Utilities argued that once the AUC deemed a cost to have been prudently incurred, the electric utility in question was thereby entitled to a full recovery of that cost, even if the asset is no longer used in the provision of service.
The ABCA canvassed the Electric Utilities Act, and found that under section 122, the AUC similarly reviews tariffs proposed by a utility to ensure that the tariff is just and reasonable, and not unduly preferential, arbitrarily or unjustly discriminatory.
The ABCA noted that, taking into account the legislative history and context alone, and disregarding the Stores Block decision, the interpretation advanced by the Utilities was permissible. However, in order for the Utilities to be successful on appeal, the question is not whether their preferred interpretation was permissible, but whether it was the only such permissible interpretation.
The ABCA held that the interpretation advanced by the Utilities was not the only permissible interpretation. The determination of the scope of allowable cost recovery was plainly within the AUC’s purview, and the legislation did not operate to remove any discretion of the AUC to deny any cost recovery. The Electric Utilities Act permitted the recovery of prudently incurred costs, but did not mandate it. Therefore, there exists no guarantee of prudent cost recovery, whether implicit or explicit in the Electric Utilities Act.
The ABCA also relied on the Utilities’ concession that any gains from assets disposed of outside the ordinary course should be solely for the benefit of the utility, indicating a reliance on the principles of Stores Block, but only for the gains on asset dispositions. Consequently, the ABCA found that the AUC’s parallel approach to gains and losses in this context was entirely reasonable.
In the result, the ABCA held that the AUC’s approach to, and application of, Stores Block was reasonable and well within the AUC’s statutory authority. The AUC’s decision in respect of the legislation and law in Alberta was reasonable. Therefore, the ABCA denied the Utilities’ appeal of the UAD Decision, and upheld the AUC’s findings as reasonable.
GCOC Decision
The Utilities filed a second set of appeals relating to the GCOC Decision. The Utilities argued that there was a lack of procedural fairness in relation to the AUC’s handling of the proceeding, as the AUC made a finding that stranded assets should not remain in rate base, regardless of the reason for having been stranded. The Utilities submitted that they were not given sufficient opportunity to provide evidence and submission on the impact of the conclusion on stranded assets contained in the UAD Decision with respect to calculating a fair return for 2011 and 2012.
The ABCA determined that the AUC exercised its authority to choose its own procedures, and in this instance took specific procedural steps to provide parties the opportunity to make submissions on stranded asset risk and its effect on return on equity. Accordingly, the ABCA saw nothing to support the notion that the Utilities were somehow unaware that stranded asset risk would be affected by the issues under consideration in the GCOC Decision.
Conclusion
The Court dismissed the Utilities’ appeals of both the UAD Decision and the GCOC Decision.
