Who bears the risk associated with “extraordinary” utility asset retirements? The next verse in the song that never ends

A new Alberta Court of Appeal decision has called into question what principles govern utilities’ ability to recover losses from natural disasters. Previously, the loss of utility assets from “extraordinary” wildfires or comparable, exceedingly rare natural disasters was borne by a utility’s shareholders pursuant to the Alberta Utilities Commission’s (Commission) Utility Asset Disposition decision (the UAD decision). In ATCO Electric Ltd v Alberta Utilities Commission,¹ the court rejected the Commission’s application of the UAD policy, opening the door to the possible recovery of such losses from ratepayers.

The UAD decision and the 2016 wildfires

ATCO Electric appealed an Alberta Utilities Commission decision that refused ATCO the recovery of the costs of assets destroyed by the 2016 wildfire near Fort McMurray. The Commission applied its UAD policy to determine that some of ATCO’s losses (the unrecovered net book value) were an “extraordinary retirement” and must therefore be borne by ATCO’s shareholders, not its ratepayers. 

The Commission developed the UAD policy in an attempt to implement the principle—drawn from the Supreme Court case commonly known as Stores Block² —that just as utility shareholders enjoy the rewards of asset ownership, they also must bear some risk from asset ownership.

In practice, the Commission applied the UAD decision by asking whether a given event was contemplated in a utility’s most recent depreciation study. A retirement is “ordinary” if the cause of the retirement was likely to have been anticipated or contemplated in the depreciation study. If not, the retirement is “extraordinary.” The unrecovered net book value of an “ordinary” retirement can be recovered from ratepayers, but for “extraordinary” retirements, the utilities’ shareholders must bear the loss. This can lead to some unintuitive results, as it did in the case at hand, where other utilities’ losses in the same wildfires were deemed recoverable.³ 

Another chapter in the Stores Block saga

In applying the UAD policy to deny ATCO’s recovery, the Commission emphasized that its hands were tied by previous “guidance of the courts,” particularly by Stores Block. The Commission also noted that the UAD decision and its effort to implement the risk/reward symmetry from Stores Block had been challenged and upheld by the Court of Appeal in FortisAlberta Inc v Alberta (Utilities Commission).⁴  

On appeal, ATCO argued that the Commission had wrongly fettered its discretion by applying its UAD policy. ATCO also argued that the Commission failed to have regard for the obligation to provide a reasonable opportunity for ATCO to recover its prudent capital investments. 

In addressing these grounds of appeal, the court framed the central issue as being the proper interpretation of Stores Block and FortisAlberta. Was it true, as the Commission had stated, that these decisions limited its discretion in allocating the costs of “extraordinary retirements”? And did the 2019 Supreme Court case Vavilov⁵ (whose facts concerned citizenship) mean the 2015 FortisAlberta decision was no longer dispositive?

The court’s answer to both questions was “no.” Stores Block was not about ratemaking. It pertained only to profits from the sale of utility assets. Stores Block has no obvious implications for how the loss of assets destroyed by natural forces should be shared between a utility and its ratepayers. Likewise, while the court’s earlier decision in FortisAlberta found that the Commission’s “extraordinary retirement” approach was reasonable, here the court ruled that FortisAlberta was a “generic, policy-based decision” that did not diminish the Commission’s wide discretion to decide each case on its facts.⁶

The end of the UAD framework?

While ATCO Electric affirms the Commission’s discretion, it also raises questions about whether that discretion includes the ability to continue to follow the approach established in the UAD decision. 

The future of the UAD decision is now in question because of the court’s findings as to what are and are not “relevant considerations,” at least regarding losses due to natural disasters. The court held that the distinction between ordinary and extraordinary retirements, when applied to destruction by natural forces, is “artificial.”⁷ Likewise, the court denied that the symmetry between gains and losses at the heart of the UAD decision was an applicable concern in the circumstances. (Notwithstanding the fact that in FortisAlberta, the court held that the same principle was reasonable, not unfair, and one the Commission could reasonably conclude that the legislation had intended.⁸)

Instead, the court set out what it called “relevant considerations.” These included whether it is fair to expect customers to bear the risk, whether the assets had been related to the provision of the utility service, whether the utility’s “self-insurance” might have saved customers money, and the utility’s right to a reasonable opportunity to recover prudently incurred costs.⁹

The court remitted the decision to the Commission with the direction to exercise its discretion “having regard to all relevant considerations, while disregarding irrelevant ones.”¹⁰

Going forward, the decision likely means a return to a more case-by-case allocation of the costs associated with stranded assets. Future Commission proceedings will also likely have ratepayer voices present (as is typical), a group that was not represented before the court.

As to what comes next:

• The consistency the UAD decision hoped to achieve after Stores Block has likely ended. Whether this case will lead to a new balance between shareholder and ratepayer interests is unclear.
• The case will complicate any continuing efforts to respond to Stores Block with legislation.
• In the near term, utility investors will likely be encouraged, as debt-rating agencies considered the UAD framework to add risk to the Alberta regime relative to other jurisdictions.
• If utility investors are protected from losses but may benefit from windfalls in a manner unlike other jurisdictions, the Commission may face calls for lower “fair returns” to reflect reduced investor risk.

The only certainty is that the law of utility asset cost recovery is shifting again. Watch this space.

The author would like to thank Akin Tawoju, articling student, for his help in preparing this legal update.