Appeal – Procedural Fairness
This was an appeal by AltaLink Management Ltd. (“AML”), ATCO Electric Ltd. (“AE”), ENMAX Power Corp. (“ENMAX”) and EPCOR Distribution and Transmission Inc. (“EDTI”) from the AUC’s decision to eliminate the ability of any electric utility to earn a return on contributions in aid of construction (“CIAC”), which are included in the Alberta Electric System Operator’s (“AESO”) tariff (“Decision”).
The ABCA granted permission to appeal on the following three questions:
- Procedural fairness: was the AUC’s failure to provide adequate notice of its intent to eliminate earning a return on CIAC procedurally unfair?
- Allocation: was the CIAC policy lawful?
- Return: did the AUC err in law by treating CIAC as expenditures rather than as capital amounts?
The Alberta Court of Appeal (“ABCA”) allowed the appeal. The court determined that, by failing to provide adequate notice that it was considering disallowing electric utilities to earn a fair return on the costs in question, the AUC breached its duty of procedural fairness owed to the appellants.
The ABCA remitted the second and third issue back to the AUC to provide the appellants with the opportunity to present their case fully and fairly.
In response to the parties’ request, the ABCA also provided an obiter statutory interpretation to assist the parties and the AUC in the future consideration of the issues.
Alberta Regulatory Framework
Alberta’s electricity industry is comprised of three main segments: generation, transmission and distribution. In Alberta, substations, transformers and switchgear are classified as transmission facilities.
This appeal involved two types of electric utilities, which own the transmission facilities and electric distribution systems. AML is a transmission facility owner (“TFO”). FortisAlberta Inc. (“Fortis”) is an electric distribution system owner, also know as a distribution facility owner (“DFO”). ATCO Electric Ltd. (“AE”), ENMAX, and EPCOR are both TFOs and DFOs.
Part 7 of the EUA sets out responsibilities imposed on the DFOs if a transmission facility serves only one service area. The DFO must arrange for the provision of system access service (“SAS”) to customers in that service area (other than direct connect customers) and undertake a financial settlement with the AESO for SAS.
Part 9 of the EUA contains general tariff provisions, which require the AESO, as well as the electric utilities owners, to prepare a tariff and apply to the AUC for approval. The AESO, the TFOs, and the DFOs must prepare their respective tariffs in accordance with the EUA and the regulations, which contain specific responsibilities and tariff provisions pertaining to each entity.
Part 2 of the EUA sets out the transmission responsibilities of both the AESO and the TFOs. The AESO is the sole provider of SAS on the transmission system. The DFOs who obtain SAS must pay the AESO the rates set out in the AESO’s tariff and comply with the terms and conditions of the tariff. The AUC approves the tariff setting out the rates the TFO will charge the AESO for the use of the TFO’s transmission facility. The AESO must pay the TFO the rates set out in the TFO’s approved tariff.
The AUC must ensure that the tariff is just and reasonable, not unduly preferential, arbitrary, unjustly discriminatory or inconsistent with the EUA. The AUC-approved tariff must provide the electric utility with a reasonable opportunity to recover certain costs and expenses, including those associated with capital related to the owner’s investment in the utility (such as depreciation), interest on the debt-funded portion of the investment, a fair return on the equity-funded portion of the investment and any taxes associated with the investment.
Contributions in Aid of Construction
This appeal dealt with construction contributions paid to the AESO by the DFOs on behalf of their customers. Until the issuance of the Decision, DFOs earned a return on the construction contributions by including these amounts in their rate base.
Subject to certain exceptions, the DFOs recover the construction contribution costs through the rates charged to all customers under their respective distribution tariffs. Construction contributions paid by the DFOs have historically been considered an investment in the transmission facilities, providing the DFOs with a reasonable opportunity to recover the costs and expenses associated with the capital related to that investment, including a fair return on the equity-funded portion of the investment. This practice had been in place for more than 20 years.
In the Decision, the AUC determined that:
- the legislative framework applicable to electric utilities supports the payment of customer contributions to the AESO as part of its tariff;
- no changes to the customer contribution policy in the approved AESO tariff were necessary;
- the legislative framework applicable to electric utilities permits the current DFO tariff recovery mechanism of AESO customer contribution payments made by a DFO; and
- since the current DFO tariff recovery mechanism applicable to customer contributions failed to provide effective price signals to incent the end-use customers to choose the most economical connection solution, the DFOs were no longer permitted to earn a return on any AESO customer contributions, flowing the customer contributions to the DFO customer requesting the new connection.
In a statutory administrative appeal, whether or not procedural fairness has been breached raises a question of law, reviewable for correctness. The duty to be fair is relevant at all stages of administrative proceedings and is not restricted to the evaluation of any ultimate decision that is targeted for review. The concept of procedural fairness does not involve deference by the reviewing court.
The ABCA noted that the duty of procedural fairness is eminently variable, inherently flexible and specific to the context. The specific procedural requirements imposed by the duty of procedural fairness are determined with reference to all circumstances. The duty of procedural fairness is underlined by the principle that those affected by a decision should have the opportunity to present their case fully and fairly.
The non-exhaustive list of factors to consider when determining the content of the duty of procedural fairness owed by an administrative decision-maker in a particular case include: the nature of the decision being made, the process followed in making it and the nature of the statutory scheme; the importance of the decision to the individual or individuals affected; the legitimate expectations of the person challenging the decision; and the choices of procedure made by the administrative decision maker itself.
The legislature has vested the AUC with many of the powers, rights, privileges and immunities of a judge of the Court of King’s Bench. The nature and structure of the statutory scheme was important in this case since it affords the AUC powers and wide discretion in fulfilling its duties and functions.
The quasi-judicial nature of the AUC, which is reinforced by s 9(2) of the Alberta Utilities Commission Act (“AUCA”), requires the AUC to provide notice of an application, afford a reasonable opportunity of learning the facts bearing on the application, and hold a hearing if it appears that its decision or order on an application may directly and adversely affect the rights of a person.
Any decision of the AUC, which has the effect of reducing an electric utility’s ability to earn a return on a class of assets, is clearly of importance to the appellants, to their shareholders and arguably to Albertans.
According to the ABCA, one of the most significant findings in the Decision was that a DFO or a TFO earning a return on AESO customer contributions is not in the public interest. It cannot be reasonably said that the new policy adopted by the AUC was predictable in the context of such a long-established practice. Thus, the AUC was required to provide clear and transparent notice that an issue to be considered was whether the DFOs and TFOs should be precluded from earning a return on such costs.
The ABCA found that the circumstances did not require the AUC to provide notice of every possible outcome for every party. However, the outcome that the TFOs and DFOs would be disallowed from earning a return on customer contributions was a departure from the allocation issue that had been the primary focus of those proceedings.
The question of whether both entities should be precluded from earning a return on those costs was distinct. There was no notice of the key change, which was that expenditures previously considered to be investments upon which a rate of return could be earned were now to be treated as costs to be recovered in annual rates.
Accordingly, the ABCA found that the AUC did not provide adequate notice that it will consider whether the DFOs and the TFOs should be precluded from earning a return on AESO customer contributions. This resulted in the appellants being denied the opportunity to present their case fully and fairly, breaching the procedural fairness owed to the appellants.
Allocation and Return
The ABCA held that, in deciding the Allocation Issue, the AUC should consider who qualifies as an “owner” for the purposes of s 122(1) of the EUA. In addressing who is characterized as the “owner” of a particular asset, the AUC should also consider whether the asset is capital related to the owner’s investment in the electric utility under s 122(1)(a) of the EUA. In deciding these questions, the AUC should consider the distinction in the EUA between transmission facilities and distribution facilities and their respective duties and responsibilities. The AUC should further have regard to the role of SAS and whether this falls within the ambit of “ownership” under the EUA.
Regarding the Return Issue, the ABCA encouraged the parties to offer, and the AUC to consider again, the meaning of the legislative language, particularly for the purposes of determining what is properly considered the type of asset that should be included as an investment asset from which recovery of return is appropriate. In that regard, the concept of an “owner” has an inclusive meaning and the law of property recognizes various proprietary interests.
Fair Return Issue
The ABCA noted that the goal behind the customer contribution policy was to exert economic discipline on siting decisions for the construction of connection facilities by sending price signals to the connecting customers. These goals are laudable and essential in a monopolistic capital-intensive industry. Electric utilities are incentivized to aggressively invest in capital because this is the conduit by which a return is earned and profits are increased. However, the statutory scheme instructs the AUC to:
- ensure that a tariff approved by it is just and reasonable, and that it is not unduly preferential, arbitrary or unjustly discriminatory, or inconsistent with the EUA; and
- have regard for the principle that a tariff approved by it must provide the owner of an electric utility with a reasonable opportunity to recover the costs and expenses associated with capital related to the owner’s investment in the electric utility, including a fair return on the equity-funded portion of the investment.