Permission to Appeal – Rate-Setting
In this decision, the Alberta Court of Appeal (“ABCA”) granted permission to AltaLink Management Ltd. (“AML”), ATCO Electric (“AE”), ENMAX Power Corporation (“ENMAX”), and EPCOR Distribution & Transmission Inc. (“EPCOR”) to appeal three decisions of the AUC. The overlapping decisions establish the treatment of expenses for the construction of electrical infrastructure related to the interconnection of the transmission and distribution systems for rate-setting purposes.
The ABCA noted that the central economic issue was which type of entity, if any, was entitled to a return on the investment or capital involved in constructing certain facilities: the Distribution Facility Owner (“DFO”), the Transmission Facility Owner (“TFO”), or neither? Both were prepared to provide the necessary investment because they welcomed earning the return that would result. This economic motivation generated the AUC’s concern that there is a built-in incentive for utilities to maximize capital investments because the higher the investment, the greater the capital base on which they can earn a return.
In AUC Decision 22942-D02-2019 regarding the “2018 Independent System Operator Tariff” (the “Original Decision”), the AUC approved the 2018 tariff for the Alberta Electric System Operator (“AESO”). In that proceeding, AML proposed a different treatment for customer contributions. The AUC determined that the traditional AESO customer contribution policy was compliant with the legislative scheme. However, on policy grounds, it approved the AML proposal, as a result of which TFOs would include the cost of the facility (including customer contributions) in its capital base after refunding a DFO for its Contributions in Aid of Construction/AESO Contribution.
AUC Decision 22942-D02-2019 was reviewed and varied by AUC Decision 24932-D01-2020. Subsequent to the review and variance decision, the AUC commenced a new proceeding in which the AUC examined the desirability and legality of the various approaches to the customer contribution policy. AUC Decision 24932-D01-2021 confirmed the historical treatment of prior AESO Contributions by DFOs and contemplates them making future AESO Contributions. The AUC, however, determined that future contributions would be treated as an operating expense, meaning that a DFO would be allowed to recover the contribution through its tariff, but neither DFOs nor TFOs could earn a capital return on future AESO Contributions. AML, AE, ENMAX, and EPCOR sought permission to appeal AUC Decision 26061-D01-2021.
Proposed Ground of Appeal
AML’s proposed ground of appeal questioned the lawfulness of the long-established customer contribution policy. In other words, was the AUC compelled by the legislation to allow a TFO, like AML, to pay or repay the DFOs Contributions in Aid of Construction and include the resulting costs in their capital base, and earn a return on the expenditure?
AML submitted that the customer contribution policy set out in Decision 26061-D01-2021 is inconsistent with the wording and purpose of the enabling legislation because “it obscures the distinction between transmission and distribution that is at the very heart of the structure of the electric utility industry”. AML argued that “asset ownership” of the transmission facilities is central to the transmission function, and that a proper interpretation of the legislation requires that Transmission System Owners be allowed to own all of their facilities.
ENMAX, EPCOR, and AE applied for permission to appeal on the basis that Decision 26061-D01-2021 would preclude any component of the electrical utility system from earning a return on an entire class of assets, namely those portions of the transmission system funded by the Contributions in Aid of Construction/AESO Contributions. They further argued that there was a breach of procedural fairness because the AUC never gave any indication that it was considering the policy where no utility would be entitled to claim these costs as capital costs.
Permission to Appeal
With respect to the procedural fairness issue, the ABCA noted that the amount of notice that the Commission must give in any particular case is a matter of degree. In this case, it was acknowledged that no specific notice was given of a possibility that neither the DFOs nor the TFOs would be allowed to earn an investment on Contributions in Aid of Construction. This departed from a long-standing practice, and no party made submissions on the particular option the AUC decided on. The ABCA held that there were two components to this issue: a) whether the adopted policy is lawful, and b) assuming it is lawful, whether it was a “good idea”. The parties could have an adequate opportunity to present arguments on the first issue in an appeal, but not on the second. The ABCA consequently held that whether the AUC’s notice was adequate is a serious, arguable point of law on which an appeal is appropriate.
The second proposed ground of appeal was the legality of the AUC’s customer contribution policy. The ABCA noted that AML intends to argue that the governing statute gives TFOs the exclusive right to own transmission facilities, and pay for them. FortisAB and the AESO will respond that the present system has been in place for decades, and that TFOs cannot be treated differently from others who are required to make Contributions in Aid of Construction. The ABCA held that, while AML cannot point to any specific statutory provision supporting its position, the issue raises a serious, arguable point of law of general importance.
Whether a particular expenditure should be categorized as operating or investment is a question of mixed fact, law, and policy, within the mandate of the AUC. The third proposed ground of appeal was the proposition that once the AUC recognizes that a particular expenditure is capital in nature, then the statute requires that the AUC allow the utility to earn a return on that expense. Given the traditional basis on which these investments have been treated, the ABCA held that this also raises a serious, arguable point of law of general importance that warrants a review by this Court.
The ABCA granted permission to appeal on all the following questions, and allowed all of the applicants to make submissions in respect of the questions:
The Fairness Issue: Did the AUC fail to meet the requirements of procedural fairness because inadequate notice was given of the way it intended to deal with Contributions in Aid of Construction?
The Allocation Issue: Is the long-established AUC customer contribution policy lawful? Was the AUC compelled by the legislation to allow Transmission System Owners to pay or repay the Contributions in Aid of Construction, include the resulting costs in their capital base, and earn a return on the expenditure?
The Return Issue: Did the Commission err in law in treating the Contributions in Aid of Construction as expenditures, rather than as capital amounts on which some component of the utility system is entitled to earn a rate of return?