Rates – Stranded Assets
ATCO Electric Ltd. (“AE”) appealed AUC Decision 21609-D01-2019 regarding ATCO Electric Ltd., Z Factor Adjustment for the 2016 Regional Municipality of Wood Buffalo Wildfire (the “Decision”). In the Decision, the AUC denied AE the ability to recover some of the costs it incurred as a result of the Fort McMurray wildfire because the AUC would not permit AE to include those costs as part of its prudently incurred costs and expenses when setting its rates.
The Alberta Court of Appeal (“ABCA”) allowed the appeal and referred the matter back to the AUC for reconsideration and determination.
Alberta Utilities Commission Act, SA 2007, c. A – ss 29(11)(c), 37.2.
Electric Utilities Act, SA 2003, c. E-5.1.
An unprecedented wildfire in the Regional Municipality of Wood Buffalo destroyed AE’s property used to distribute electrical services in that municipal area. The AUC did not allow AE to continue to recover the remaining net book value of the assets destroyed in the wildfire from its customers. The reasonable opportunity previously given to recover those prudently incurred costs was effectively rescinded because the AUC removed the remaining net book value of the destroyed assets from the calculation of AE’s rates.
AE applied for a Z factor adjustment to its rates set under the relevant performance-based regulation plan as a result of the costs related to the wildfire. The AUC directed AE to also address the issue of the undepreciated capital cost or net book value of the assets destroyed by the fire. Those assets or costs were characterized as “stranded”. AE argued that the AUC unlawfully fettered its discretion when the AUC determined that the ATCO Gas & Pipelines Ltd v Alberta (Energy & Utilities Board),  1 SCR 140 (“Stores Block”) and FortisAlberta Inc v Alberta (Utilities Commission), 2015 ABCA 295, 28 Alta LR (6th) 252 (“FortisAlberta”) decisions limited its flexibility in dealing with destroyed assets.
The ABCA, however, identified the issue to be whether or not the AUC correctly interpreted and applied the legal standards that governed in the circumstances. In other words, the underlying issue was whether losses arising from forces of nature during normal operations should be carried by the customers of the utility, or the utility’s shareholders.
The AUC Decision
In the Decision, the AUC determined that the wildfire gave rise to an extraordinary retirement of the destroyed assets, and that the principles established by Stores Block and FortisAlberta, dictated that the loss of the destroyed assets was for the account of AE’s shareholders.
The ABCA Decision
Z factor adjustments are permitted to allow variation of what was previously set as a just and reasonable tariff. They are designed to account for exogenous events outside the control of the utility and for which the utility has no other reasonable opportunity to recover the cost. Exceptional losses, by their very nature, are unlikely to have been factored in when the original tariff was set. The ABCA held that the damage caused by the wildfire falls within this definition and that it seems counterintuitive to disallow the recovery of prudent costs.
The ABCA found that the AUC considered itself bound by its interpretation of Stores Block and FortisAlberta and that the outcome of the appeal turned largely on the correctness of that interpretation. The ABCA held that the AUC has broad discretion under the Electric Utilities Act (“EUA”) in relation to depreciation, stranded assets and prudent expenditure and that there is nothing in Stores Block or FortisAlberta to the contrary.
The ABCA held that Stores Block was not about setting just and reasonable tariffs, and it was primarily concerned with the treatment of profits following from the sale of assets. Stores Block did not purport to limit the AUC’s discretion to deal with the depreciation of assets destroyed by forces of nature. The ABCA also noted that FortisAlberta was a generic, policy-based decision that had no particular facts before it. Consequently, the ABCA determined that the AUC erred in thinking that these earlier decisions dictated its treatment of assets stranded by unforeseen forces of nature. The ABCA held that there is no binding authority that compels the AUC to rely on the accounting details underlying the predicted survival curves of asset pools to decide how to deal with assets unexpectedly and permanently removed from active service by forces of nature.
The case under appeal differs from the previous cases. In the case of the wildfires, there were no proceeds from the destruction of the assets. Contrary to the facts in Stores Block, the assets in question were still in use, remained in the rate base, and only ceased to be used for the distribution of electricity because they were destroyed. Accordingly, the question at issue in the Decision was not decided by Stores Block or FortisAlberta, and could not limit the AUC to one approach in its decision.
The assets in question had been prudently incurred and were destroyed by the wildfire while they were being used to provide utility services. The issue was if it was fair to the customers and the utility that the customers bear that loss. The ABCA found that this question tied back to the wording of the EUA. The ABCA determined that allocating the loss was not dependent on the difference between ordinary and extraordinary retirements or any ownership interest in the assets held by the customers, as noted by the AUC.
The ABCA concluded that the decision under appeal resulted from errors of law, particularly the conclusion that the AUC’s options for treating destroyed assets were constrained by Stores Block. The ABCA, therefore, allowed the appeal and referred the matter back to the AUC.