Canada: Court Of Appeal Upholds AUC's View On "Stranded Assets"

In 2011, the Alberta Utilities Commission ("AUC") issued its decision in the Generic Cost of Capital ("GCOC") proceeding. In 2013, the AUC issued its decision in the Utility Asset Disposition ("UAD") proceeding. Both decisions considered the issue of "stranded assets".

Stranded assets are those utility assets that, while still in service, become incapable of being used because of some extraordinary event. The existence of stranded assets, in the context of a regulated utility, gives rise to an important question: who bears the loss of the asset which is not fully depreciated but which is incapable of use? The AUC, in the aforementioned decisions, concluded that utility shareholders, and not ratepayers, bear the risk of holding stranded assets.

Five electric utilties (FortisAlberta Inc., AltaLink Management Ltd., Enmax Power Corporation, EPCOR Distribution and Transmission Inc. and ATCO Electric Ltd.) and two gas utilities (AltaGas Utilities Inc. and ATCO Gas and Pipelines Ltd.) appealed the AUC's decisions.

On September 18, 2015, Justice Paperny, with Watson J.A. and Rowbotham J.A. concurring, dismissed the appeals in their entirety. Justice Paperny's reasons canvassed the context from which the appeals arose, the reasonableness of the AUC's decision in the UAD proceeding and the duty of fairness in relation to the GCOC proceeding.

In holding that the AUC's decisions were reasonable the Court of Appeal made the following findings. First, the Court of Appeal rejected the argument that the legislation governing ratemaking created a distinction between reasonable return on investment and recovery of prudent capital investment, the latter being guaranteed as of right to the utilities.

Second, and related to the first point, the Court of Appeal rejected the Appellants' definition of the Regulatory Compact as being "overly broad". The Regulatory Compact involves a utility being granted the right to provide a service in a particular area with an opportunity to earn a reasonable rate of return and recover prudently incurred costs. The utilities' view that the Regulatory Compact meant a utility was "guaranteed" full recovery of all costs was found to be excessive.

Third, the Court of Appeal rejected the argument that the AUC's decision imparted an excessive expense on the utilities and was therefore unfair. In rejecting this claim, the Court of Appeal pointed to the symmetrical treatment of gains and losses (i.e. shareholders exclusively benefit from any gain on the disposition of assets and exclusively bear, therefore, the risk of any loss).

Lastly, the Court of Appel held that the AUC had the legislative imperative to exercise discretion on cost recovery, citing the "expert and policy role" of the AUC in fulfilling its legislative mandate and one-hundred plus years of oversight. Consequently, the AUC's rejection of the interpretation put forward by the electric utilities, that the legislation mandated the recovery of "prudent costs", was reasonable. The Court of Appeal, in finding the AUC's decision and approach to be reasonable, held that all the legislation mandates is a reasonable opportunity to recover prudently incurred costs.

The utilities' filed a second set of appeals alleging lack of procedural fairness on the part of the AUC's handling of the GCOC proceeding. The Court of Appeal rejected this position, finding that the parties had repeated opportunities to raise issues and make submissions.

The decision confirms that if a statute provides a regulator with discretion in the interpretation of its home statute then the court will generally defer to the regulator's interpretation. Applied to the present facts, the decision stands for the proposition that what constitutes a prudent and reasonable cost incurred by a utility will be established by the AUC and, so long as the AUC's decision is justifiable and transparent, it is unlikely to be interfered with by a reviewing court.

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