35624   ATCO Gas and Pipelines Ltd. v. Alberta (Utilities Commission)

Public utilities — Rate setting — Administrative Law

On appeal from a judgment of the Alberta Court of Appeal (2013 ABCA 310), affirming a decision of the Alberta Utilities Commission (2011 CarswellAlta 1646)

The Alberta Utilities Commission denied the request by ATCO Gas and Pipelines Ltd. and ATCO Electric Ltd. (“ATCO Utilities”) to recover, in approved rates, certain pension costs related to an annual cost of living adjustment (“COLA”) for 2012. Instead of approving recovery for an adjustment of 100 percent of annual consumer price index (“CPI”) (up to a maximum COLA of 3 percent), the Commission ruled that recovery of only 50 percent of annual CPI was reasonable. The Alberta Court of Appeal dismissed the ATCO Utilities’ appeal from the decision of the Commission.

Held (7:0): The appeal should be dismissed.

A key principle in Canadian regulatory law is that a regulated utility must have the opportunity to recover its operating and capital costs through rates. This requirement is reflected in the Electric Utilities Act and the Gas Utilities Act of Alberta, as these statutes refer to a reasonable opportunity to recover costs and expenses so long as they are prudent. The Commission must therefore determine whether a utility’s costs warrant recovery on the basis of their reasonableness — or, under the Electric Utilities Act and the Gas Utilities Act, their “prudence”. Where costs are determined to be prudent, the Commission must allow the opportunity to recover them through rates.

The prudence requirement is to be understood in the sense of the ordinary meaning of the word: for the listed costs and expenses to warrant a reasonable opportunity of recovery, they must be wise or sound; in other words, they must be reasonable. Nothing in the ordinary meaning of the word “prudent” or the use of this word in the statute as a stand‑alone condition says anything about the time at which prudence must be evaluated. Thus, neither the ordinary meaning of “prudent” nor the statutory language indicate that the Commission is bound by the legislative provisions to apply a no‑hindsight approach to the costs at issue, nor is a presumption of prudence statutorily imposed in these circumstances. In the context of utilities regulation, there is no difference between the ordinary meaning of a “prudent” cost and a cost that could be said to be reasonable. It would not be imprudent to incur a reasonable cost, nor would it be prudent to incur an unreasonable cost. Further, the burden of establishing that the proposed tariffs are just and reasonable falls on public utilities, which necessarily imposes on them the burden of establishing that the costs are prudent. The impact of increased rates on consumers cannot be used as a basis to disallow recovery of such costs. This is not to say that the Commission is not required to consider consumer interests. These interests are accounted for in rate regulation by limiting a utility’s recovery to what it reasonably or prudently costs to efficiently provide the utility service. That is, the regulatory body ensures that consumers only pay for what is reasonably necessary.

Though the Electric Utilities Act and the Gas Utilities Act do contain language allowing for the recovery of “prudent” costs, the statutes do not explicitly impose an obligation on the Commission to conduct its analysis using a particular methodology any time the word “prudent” is used. Thus, the Commission is free to apply its expertise to determine whether costs are prudent (in the ordinary sense of whether they are reasonable), and it has the discretion to consider a variety of analytical tools and evidence in making that determination so long as the ultimate rates that it sets are just and reasonable to both consumers and the utility.

The standard of review of the Commission’s decision in applying its expertise to set rates and approve payment amounts is reasonableness. Under this standard of review, the Commission’s interpretation of its home statute is entitled to deference. In this case, it was not unreasonable for the Commission to decide, without applying a no‑hindsight analysis, that 50 percent of CPI (up to a maximum COLA of 3 percent) represented a reasonable level for setting the COLA amount for the purposes of determining the pension cost amounts for regulatory purposes: the Commission was not statutorily bound to apply a particular methodology to the costs at issue in this case; the use of the word “prudent” in the Electric Utilities Act and the Gas Utilities Act cannot by itself be read to impose upon the Commission a specific no‑hindsight methodology; and the disallowed costs were forecast costs. Accordingly, it was reasonable for the Commission to evaluate the ATCO Utilities’ proposed revenue requirement in light of all relevant circumstances. Further, because the Commission did not use impermissible methodology, it was not unreasonable for the Commission to direct the ATCO Utilities to reduce their pension costs incorporated into revenue requirements by restricting the annual cost of living adjustment.

The judgement of the Court was delivered by Rothstein J.

Neutral Citation: 2015 SCC 45. Docket No. 35624