ISO Rule – Complaint – Line Losses – AUC Authority
Milner Power Inc. (“Milner”) first filed its complaint with the AUC predecessor, the Alberta Energy and Utilities Board (the “AEUB”), on August 17, 2005 in respect of the Independent System Operator (“ISO” or “AESO”) Rule 9.2: Transmission Loss Factors and Appendix 7: Transmission Loss Factor Methodology and Assumptions (collectively, the “Line Loss Rule”), implemented on January 1, 2006. Milner’s initial complaint was dismissed by the AEUB, and that decision was later vacated by the Alberta Court of Appeal (“ABCA”), and remitted to the AUC for a rehearing.
In the time between the initial AEUB decision, and the Court of Appeal’s determination remitting the decision to the AUC, the Line Loss Rule, the Transmission Regulation (“T-Reg”) and the 2003 version of the Electric Utilities Act (the “EUA”) in force at that time had all been updated, amended or refiled in some form. On June 11, 2012, Milner submitted a second complaint, on a without prejudice basis, in respect of the re-filed Line Loss Rule. ATCO Power Ltd. (“ATCO”) also submitted a complaint on the same date.
The AUC initially held in Decision 2012-104 that the Line Loss Rule did not comply with the relevant provisions of the T-Reg and the 2003 version of the EUA in force at that time, and found that the Line Loss Rule was unjust, unreasonable, unduly preferential, arbitrarily and unjustly discriminatory, and inconsistent with and in contravention of the 2003 EUA and the relevant portions of the T-Reg. The AUC later confirmed these principal findings in a review and variance hearing, resulting in Decision 2014-110. These findings and decisions comprise Phase 1 of Proceeding No. 790.
The AUC determined that Phase 2 of Proceeding 790 would be split into three modules, the first of which is addressed by this decision. The AUC considered the following issues in this decision:
(a) Whether the Line Loss Rule, as it was from January 1, 2006 to the present, is a tariff, a rate, a charge, or something else. Whether a line loss factor produced by the Line Loss Rule is a tariff, a rate, a charge or something else. The legal significance of interpreting the line loss rule and/or the line loss factor as such;
(b) Whether or not Milner’s 2005 complaint continued post-2008 and, if so, for how long;
(c) Compliance of the line loss rule, as it was from January 1, 2009 to the present, with applicable legislation and regulations; and
(d) For each of the periods from January 1, 2006 to December 31, 2008; January 1, 2009 to June 11, 2012; and June 12, 2012 forward, the AUC’s jurisdiction to:
(i) Change or replace an ISO rule that was in effect;
(ii) Change the charges and credits for transmission line losses in an ISO tariff that was in effect; and
(iii) Order any form of financial compensation including to whom and from whom such compensation might be paid.
Line Loss Rule as a Rate, Charge, Tariff or Something Else
The AUC looked to the statutory regime under the EUA and the T-Reg to determine the nature of the Line Loss Rule and its resulting loss factors as a rate, charge, tariff, or something else. The AUC noted that the ISO must “manage and recover the costs of transmission line losses” pursuant to section 17(e) of the EUA, and may include those costs either in the ISO tariff, or through charging ISO fees under section 30(4) of the EUA. The AUC found that the AESO has consistently recovered transmission line losses through the ISO tariff.
Milner 2005 Complaint Continue Post-2008
In respect of the status of Milner’s complaint submitted in 2005, the AUC disagreed with the assertions of TransCanada Energy Ltd. (“TCE”), AltaGas Ltd. (“AltaGas”), Capital Power Corporation (“CPC”) and TransAlta Corporation (“TransAlta”) that the amendments to the Line Loss Rule resulted in the Milner complaint coming to an end.
The AUC held that the Line Loss Rule has continued in all relevant respects since it was put into effect January 1, 2006, as it continues to employ a marginal loss factor divided-by-two methodology (“MLF/2 Methodology”). The AUC found that neither the MLF/2 Methodology nor any other part of the Line Loss Rule was changed. With respect to the amendments to the T-Reg, the AUC held that such changes resulted only in a renumbering of the relevant sections, and not a substantive change.
In dealing with the continuing nature of the Milner complaint, the AUC also held that the Milner complaint would meet the statutory requirements for relief under the amended EUA. The AUC noted that no party made submissions on the compliance of the Line Loss Rule under this standard, and that the continuing nature of both the Line Loss Rule and the relevant sections of the T-Reg resulted in the Line Loss Rule not complying with the current statutory regime. As a result, the AUC held that a rule that contravenes an Act cannot be in the public interest, thereby satisfying the current requirement of demonstrating that the Line Loss Rule was not in the public interest under section 20.4(1).
Statutory Regime
The AUC found that the statutory regime governing ISO rules resulted in a scheme in which ISO rules are filed and become effective without any express regulatory approval, but are reviewed on a complaint basis. The AUC found that a similar regime exists in dealing with the ISO tariff under section 30 of the EUA, insofar as many of the rates or charges approved under the ISO’s tariff are not reviewable by the regulator, except on a complaint. The AUC referred to the effect of the rulemaking provisions in the EUA as a “negative disallowance scheme”. A “negative disallowance scheme” was described by the Supreme Court of Canada in Bell Canada v Canada (Canadian Radio-Television and Telecommunications Commission), [1989] 1 SCR 1722 (“Bell Canada”) as “schemes which grant utility companies the right to fix tolls as they wish but also grant users the right to complain before an administrative agency which has the power to vary those tolls if it finds that they are not “just and reasonable””.
The AESO argued that the ISO tariff is a positive approval scheme, and thereby precluded a remedy through the tariff, given the AUC’s positive approval in prior years. The AUC disagreed with this assessment, noting that the AUC effectively has no avenue through which it can test the justness and reasonableness of the line loss charges before approving them in the ISO tariff, except through a complaint against the Line Loss Rule itself. The AUC held that where rates to be approved in the ISO tariff are determined through an ISO rule, there is no “positive approval scheme”.
Retroactive Rate Making and AUC Authority
As many parties made submissions on the AUC’s authority with respect to retroactive ratemaking, the AUC undertook a review of the jurisprudence to determine whether its powers include the ability to grant tariff based relief from an unlawful ISO rule. All the parties agreed that, if the AUC posses the authority to retrospectively alter the unlawful rates, that authority must be found either in the statute itself, or in the common law interpreting such statutes.
The AUC noted a recent judgment of the ABCA, Calgary (City) v Alberta (Energy and Utilities Board), 2010 ABCA 132 for the proposition that retroactive or retrospective ratemaking is generally impermissible. However, the AUC found five exceptions to this prohibition on retroactive ratemaking in the case law:
(a) Adjustments to interim rates (Re Coseka Resources Ltd. and Saratoga Process Co., 1981 ABCA 180);
(b) The use of deferral accounts to deal with differences between forecast and actual costs and revenues (Bell Canada v Bell Aliant Regional Communications), [2009] 2 SCR 764;
(c) Changes to rates as a result of the operation of a negative disallowance scheme (Bell Canada);
(d) Changes to rates where affected parties knew or ought to have known that rates were subject to change (i.e. the “knowledge exception”) (ATCO Gas and Pipelines Ltd. v Alberta (Utilities Commission), 2014 ABCA 397); and
(e) Replacing rates in a tariff that has been determined to be a nullity.
The AUC found that the operation of ISO rules, insofar as they affect the ISO tariff, were a negative disallowance scheme, in which the statutory scheme presumes that rates are just and reasonable from the outset. This presumption can be rebutted through a successful complaint or challenge to determine whether they are unlawful. In such a scheme, the AUC held that the regulatory agency must be taken to have the authority to revise rates with retroactive effect, at least to the date the complaint was made, subject to any statutory restrictions. The AUC supported this finding by noting the perverse incentives available to the parties making or supporting the rates by creating a regulatory delay if only prospective relief were available.
Since the AUC determined the existence of a negative disallowance scheme, it held that once Milner made its complaint, then all affected parties are taken to know two things:
(a) That the object of the complaint may change; and
(b) That if the complaint is upheld, the object of the complaint may change with retrospective effect to the date that the complaint was first made.
The AUC held that the imputed knowledge above is not disavowed by virtue of the complexity of the issues raised, the uncertainty of relief available, or the date from which such relief might be granted, and to whom such relief is available. The AUC also held that such knowledge is not dislodged by the number of regulatory or judicial proceedings required to arrive at such a finding, or the total length of time required to reach such a finding.
After review of the jurisprudence, the AUC set out four key findings on retroactive and retrospective ratemaking:
(a) Prohibitions on retroactive or retrospective ratemaking do not apply when parties knew or ought to have known that rates may be subject to change;
(b) In some cases, this knowledge may flow from the nature of the proceeding, such as for interim rates, deferral accounts or complaints against rates or rules subject to a negative disallowance scheme;
(c) Negative disallowance schemes share five main attributes:
(i) Rates or rules come into effect without prior review or approval;
(ii) Rates or rules are presumed to be just and reasonable until challenged by a written complaint;
(iii) Once a complaint is launched, the justness and reasonableness of the rate or rule remains in question until a final determination is made;
(iv) Pending such a final determination, parties remain on notice that the rate or rule remains subject to change; and
(v) If a rate or rule is determined to be unlawful, it may be changed with retroactive or retrospective effect to the date the complaint was first filed; and
(d) Policy concerns respecting prohibitions against retroactive or retrospective ratemaking are much diminished when parties know that rates may change. Such knowledge eliminates incentives for parties that have benefitted from unjust and unreasonable rates or rules to act opportunistically to the detriment of parties that would otherwise be unjustly harmed by the rate or rule.
AUC Findings
Accordingly, the AUC made the following findings in respect of the Line Loss Rule:
(a) The non-compliant provisions of the 2005 Line Loss Rule remain in effect today, and have remained in effect, and continue to be non-compliant with the EUA and the T-Reg uninterrupted since January 1, 2006;
(b) Milner’s complaint has continued and continues uninterrupted since August 17, 2005;
(c) The complaints against the Line Loss Rule satisfy the statutory requirements for the AUC to grant relief from January 1, 2009 forward, under either version of the EUA;
(d) The complaint in respect of the Line Loss Rule is to complain about the line loss charge components of the ISO tariff, and therefore those components of the ISO tariff are similarly unjust, unreasonable, unduly preferential, arbitrarily and unjustly discriminatory, and inconsistent with and in contravention of the EUA and the relevant portions of the T-Reg, since 2006;
(e) Any remedy the AUC may grant through a tariff-based remedy does not constitute retroactive ratemaking; and
(f) The AUC may grant a tariff based remedy or relief under the 2003 EUA.
The AUC noted that the relief and remedies to be granted in accordance with the above findings are to be determined in modules B and C of Phase 2 of Proceeding 790.
