Rates – Information Technology Costs
In this decision, ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd. (the “Applicants”) sought permission to appeal an AUC decision that allowed only part of the Applicants’ information technology (“IT”) service costs. Permission to appeal was denied.
Factual Background
Prior to December 1, 2014, the Applicants’ IT services were provided by an unregulated entity called ATCO I-Tek. I-Tek and the Applicants were owned by the same parent companies, collectively called “ATCO” in the AUC decision. ATCO decided to re-evaluate its means of obtaining IT services. Ultimately, it decided to sell I-Tek. It invited bids for IT service provision, with the requirement that bidders also had to offer to buy I-Tek.
In August 2015, a global IT company called Wipro bought I-Tek and entered into agreements to provide IT services to ATCO and the Applicants. The Applicants’ IT service agreements were the subject of the AUC proceedings.
AUC’s Decision
In determining whether the IT service pricing resulted in just and reasonable rates, the AUC considered the Applicants’ sourcing strategy and the structure of the bidding process. The AUC found that the decision to couple the sale of I-Tek with the IT service contract limited the pool of potential bidders and therefore raised the price of IT services.
The appropriate remedy was to make a partial price reduction. After considering the sourcing strategy, the bid process, the evidence of fair market value, and the structure of the IT service agreements, the AUC reduced first year expenditures by 13%, with a follow-on effect on subsequent years. The AUC imposed a glide path to reduce weighted average prices by 4.61% per year in years 2 through 10.
Test for Permission to Appeal an AUC Decision
The Court outlined the test for permission to appeal, noting where the proposed question on appeal goes to “the core of the AUC’s mandate and expertise”, the Court will be highly deferential in its review and will apply a high bar to obtaining permission to appeal. It further noted that this case involved ratemaking, which “is at the heart of a regulator’s expertise.”
Grounds of Appeal
Ground One
On the first ground, the Applicants alleged that the AUC made certain findings based on no evidence, or no credible and reliable evidence, or contrary to the only evidence on record, and that any of these errors is an error in law.
The Court noted that the Applicants bore the burden of showing that their proposed rates were just and reasonable, and that the AUC’s conclusion that they failed to meet this burden had significant factual and evidential components.
The Court found that the AUC was aware of and considered all the evidence before it, as demonstrated by its summaries of evidence at the beginning of each section of its analysis. The Court was satisfied that the AUC did not overlook evidence and that it interpreted and assessed the evidence, as it was entitled to do.
Whether the evidence was credible or reliable was a question of fact for the AUC to decide. Only in extreme cases can decisions on credibility or reliability amount to questions of law. The Court was not satisfied that this was such a case.
The Court was not satisfied that the errors alleged under this ground raised questions of law.
Ground Two
The Applicants submitted that the AUC has a legislated obligation to ensure that regulated utilities have a reasonable opportunity to recover reasonably and prudently incurred costs and that the AUC failed to fulfill its obligation in this case. They argued that, if the decision to incur the costs was prudent and reasonable, they must be given the opportunity to recover their costs — implicitly, meaning the entirety of their claimed costs.
The Court noted that the AUC is not bound to accept or reject a claim for cost recovery in its entirety. It is empowered to determine which costs are “appropriate”. The Court further noted that the AUC was not satisfied that the Applicants’ IT services sourcing strategy was prudent. It found that the Applicants did not identify any extricable legal error in the AUC’s handling of certain topics, and did not satisfy the Court that the high bar for permission to appeal was met.
Ground Three
The Court noted that the AUC was aware that the coupling of the I-Tek sale with IT service sourcing created two different risks of cross-subsidization: either the ratepayers could effectively subsidize the I-Tek sale (if they were required to pay for IT services at an inflated rate), or the shareholders of the ATCO entities could effectively subsidize the ratepayers (if the entire actual cost of IT services were not passed on to the ratepayers).
The AUC found that the evidence suggested some cross-subsidization in the first sense, but the coupling of sale and services impaired its ability to assess its extent. This improper influence on the service pricing contributed to the AUC’s conclusion that the IT service prices were not “just and reasonable.”
The Applicants did not attack this finding. Rather, they alleged error in connection with the second type of cross-subsidization. They first asserted that the AUC failed to protect against impermissible cross-subsidization of ratepayers by shareholders when it denied full recovery of IT service costs.
The City of Calgary (“City”) had asked the AUC to subtract a portion of the ATCO I-Tek sale price from the amount recoverable under the IT service agreements. The Applicants opposed, claiming impermissible cross-subsidization. The Court noted that the AUC chose not to apply the City’s approach, and the AUC, therefore, did not need to consider this version of cross-subsidization.
The Court found that the Applicants had not identified any error by the AUC.
Secondly, the Applicants suggested that the effect of the AUC’s decision was to allow impermissible cross-subsidization in the second sense. The Court noted again that the AUC found some indication of cross-subsidization in the first sense. It further noted that it struggled to see how there could be cross-subsidization in both directions simultaneously. Ultimately, the Court noted that it was unable to characterize the suspected effect of a decision as an error in law or jurisdiction.
Conclusion
The Court found that the Applicants raised no issues of pure law or jurisdiction. Permission to appeal was denied.
