Gas – Franchise Agreement – Section 45 of the Municipal Government Act – Unreasonable Discrimination
In this decision, the AUC considered an application by Evergreen Gas Co-op Ltd. (the “Co-op”) for approval of a natural gas franchise agreement with the Town of Drayton Valley (the “Town”) pursuant to section 45 of the Municipal Government Act.
The AUC found that Clause 5(a)(ii) in the proposed franchise agreement relating to franchise fees was discriminatory and therefore not in the public interest. On that basis, the AUC declined to approve the franchise agreement as filed.
Jurisdiction and Nature of the AUC’s Review
The AUC’s authority to approve franchise agreements derives from section 45 of the Municipal Government Act. Subsection 45(1) provides that: “A council may, by agreement, grant a right, exclusive or otherwise, to a person to provide a utility service in all or part of the municipality, for not more than 20 years.” Subsection 45(3) requires approval by the AUC “… [b]efore the agreement is made, amended or renewed.”
The AUC noted that while the Municipal Government Act requires AUC approval of a franchise agreement, it does not specify the basis for granting it. Based on similar provisions from the Gas Utilities Act, Gas Distribution Act, and previous AUC decisions, the AUC affirmed that the purpose of the AUC reviewing franchise agreements is to determine whether “the privilege or franchise is necessary and proper for the public convenience and properly conserves the public interests.”
Franchise Fee Payable Only by New Customers Constitutes Unreasonable Discrimination
Section 5(a) of the proposed franchise agreement provided that the franchise fee would only be payable by new customers from and after the initial 10-year term.
The AUC set out the following principles regarding its consideration of what constitutes unreasonable discrimination in any service charge, rate or toll between utility customers:
(a) Discrimination in utility regulation can arise in two circumstances:
(i) first, when a utility fails to treat all users of a public utility equally where no reasonable distinction can be found between those favoured and those not favoured; and
(ii) second, when a utility treats all its users equally where differences between users would justify different treatment.
(b) In considering whether different treatment constitutes unreasonable discrimination, the AUC will consider:
(i) the presence or absence of any rationale or logic underlying the charges imposed to determine whether a reasonable distinction exists between customers to support their differential treatment; and
(ii) whether the differential charges between customers are supported by sufficient rationale or logic and factbased evidence justifying the distinction.
In this case, The AUC found that:
(a) while the expressed intention explained why no franchise fee was payable within the initial 10-year term of the proposed franchise agreement, the Co-op did not offer a reasonable rationale or fact-based justification for the differential treatment of the two customer groups (existing and new) after the expiry of its initial 10-year term; and
(b) further, the Co-op failed to demonstrate that the point in time at which a customer takes service from a natural gas supplier, on its own, afforded sufficient justification for the differential imposition of the franchise fee.
The AUC concluded that the Co-op failed to satisfy that a reasonable distinction existed between new and existing customer groups supporting their differential treatment concerning the payment of franchise fees after the expiration of the initial 10- year term of the proposed franchise agreement. On that basis, the AUC found that Clause 5(a)(ii) in the franchise agreement allowed the imposition of discriminatory rates and was, therefore, not in the public interest. Consequently, the AUC declined to approve the franchise agreement as filed.