Executive Summary: Key Legal and Evidentiary Issues

• Three Alberta electricity distribution utilities appealed the Alberta Utilities Commission's decision setting rate parameters for the third performance-based regulation term running from 2024 to 2028.
   
• Central to the appeal was whether the Commission erred by basing supplemental capital funding (the "K-bar" calculation) solely on historical average capital additions rather than incorporating forecast costs.
   
• ENMAX separately argued that the Commission's use of a lower productivity X factor in the K-bar calculation artificially reduced the funding utilities could recover.
   
• All three appellants challenged the Commission's eligibility criteria for "Type 1" extraordinary capital funding as unreasonably restrictive.
   
• Fortis additionally argued that the Commission failed to address its submissions on removing a "stretch factor" from its productivity adjustment to reflect financial risks tied to serving rural electrification associations.
   
• Governing legislation required the Commission to ensure that approved rates give utilities a reasonable opportunity to recover prudently incurred costs, including a fair return on equity, under the Electric Utilities Act.
   

Facts of the case

FortisAlberta Inc., ENMAX Power Corporation, and ATCO Electric Ltd. are distribution utilities that provide electricity distribution services within designated service areas in Alberta, subject to regulation by the Alberta Utilities Commission under the Electric Utilities Act. Since 2013 (2009 for ENMAX), the rates these utilities charge customers have been set through a performance-based regulation model rather than the earlier cost-of-service model. Under performance-based regulation, "going-in rates" are established during a rebasing year based on forecast costs, and rates are then adjusted annually using an inflation-less-productivity ("I-X") mechanism rather than through a full cost-of-service review. The Commission decision under appeal, AUC Decision 27388-D01-2023, dated October 4, 2023, set the parameters for the third performance-based regulation term, covering 2024 through 2028. The appellants challenged the Commission's approach to supplemental capital funding, arguing it denied them a reasonable opportunity to recover their prudently incurred costs, including a fair return on equity. Fortis separately argued that the Commission had erred by failing to explain its refusal to adjust Fortis's productivity factor to account for financial risks associated with its obligation to permit rural electrification associations to access its distribution system.

Policy and legislative provisions at issue

Section 121(2)(a) of the Electric Utilities Act requires that a tariff approved by the Commission be "just and reasonable," meaning fair to both consumers and the utility. Section 122(1) requires the Commission to have regard for the principle that an approved tariff must provide a utility with a reasonable opportunity to recover costs and expenses associated with capital investment, including depreciation, interest, and a fair return on equity, provided those costs are prudent. Section 119(1) requires utilities to prepare and apply for approval of a tariff, and section 121(1) requires the Commission to consider each tariff application after notice to interested parties. The performance-based regulation framework itself incorporates several supplemental mechanisms, including a "Y factor" for costs outside management's control, a "Z factor" for exogenous events, an earnings-sharing mechanism above 200 basis points over the approved return on equity, and a re-opener provision triggered by specified deviations in earned return on equity. Supplemental capital funding is calculated through a "K-bar" comparison, which compares base-rate funding for capital projects (step 1) against a notional revenue requirement derived from a utility's historical average capital additions (step 2). Separately, the framework provides for "Type 1" capital tracker funding for extraordinary capital projects, distinct from the general "Type 2" funding envelope.

Reasoning and analysis

The Court applied a correctness standard of review to the questions of law and jurisdiction raised, while affording deference to the Commission's assessment of underlying questions of fact, policy, and discretion. On the K-bar calculation, the Court found the Commission had not erred in relying on historical average capital additions from 2018 to 2022 rather than forecasts, noting the Commission's reasoned explanation that forecasting over a five-year term risked over-forecasting, information asymmetry, and increased regulatory burden. The Court rejected the appellants' argument that new, significant capital projects — such as Fortis's advanced metering and wildfire mitigation programs and ATCO's grid modernization project — demonstrated that historical averages would leave them underfunded, finding the evidence presented was incomplete and did not establish the broader context of each utility's overall capital additions. On ENMAX's argument regarding the productivity X factor, the Court found that counsel for ENMAX had declined to challenge the Commission's technical explanation of the distorting accounting effect that justified using a lower X factor in the K-bar comparison, leaving no basis to find reviewable error. On the Type 1 capital criteria, the Court held that the Commission had reasonably required that qualifying projects not have been previously included in a utility's rate base, and that three prior decisions denying Type 1 applications did not establish that the criteria were impossible to meet. However, on the stretch factor issue, the Court found that the Commission's reasons nowhere addressed Fortis's submissions and evidence concerning the business risks arising from its obligation to serve rural electrification associations without full cost recovery. The Court held that failing to provide sufficiently intelligible reasons responsive to a party's submissions on a relevant issue constitutes an error of law, since it prevents meaningful appellate review. The Court also commented generally on the Commission's heavy reliance on acronyms and initialisms, observing that Commission decisions should be written so that lay persons can reasonably follow them, though this observation did not affect the outcome of the appeal.

Ruling and overall outcome

The Court of Appeal dismissed the appellants' grounds of appeal relating to the Commission's use of historical averages in the K-bar calculation, the productivity X factor adjustment, and the Type 1 capital eligibility criteria, confirming the Commission's decision on those issues. The Court allowed Fortis's appeal on the narrower issue of the Commission's failure to address its submissions regarding the stretch factor tied to rural electrification association service obligations, finding this omission to be an error of law. That specific issue was vacated and referred back to the Commission for further consideration and redetermination. Because the appellants did not succeed in establishing that the Commission's approach to supplemental capital funding denied them a reasonable opportunity to recover their prudently incurred costs, the Court did not consider the Office of the Utilities Consumer Advocate's application to introduce fresh evidence on returns earned in the first year of the third term. The decision does not specify a monetary award, damages, or costs order; the remedy granted was procedural, in the form of remittal of the stretch-factor issue to the Commission.